Business Finance Homework: Profit vs Cash and Expenditure Differences

This business finance assignment provides a detailed analysis of key concepts, differentiating between profit and cash, and explaining why profit is not always a reliable indicator of cash balance. It explores various business transactions that do not involve immediate cash movement. The assignment further differentiates between capital and revenue expenditure, expenses and drawings, gross profit and net profit, cash budget and cash flow statement, and accruals and prepayments. Additionally, it explains essential terms such as assets, liabilities, ordinary shares, preference shares, dividend, stock exchange, venture capital, budget, capital income, and company. This document is available on Desklib, a platform offering a wide range of study resources and AI-powered tools for students.

Business Finance

Contents
TASK 1.1.........................................................................................................................................3
TASK 2.1.........................................................................................................................................3
Are the profits and cash same? Also, think of any business transactions that do not involve an
immediate movement of cash?....................................................................................................3
Differentiate between:.................................................................................................................4
Explain the below terms:.............................................................................................................5
REFERENCES................................................................................................................................8

TASK 1.1
Covered in Excel Spreadsheet
TASK 2.1
Are the profits and cash same? Also, think of any business transactions that do not involve an
immediate movement of cash?
No, profits are not the reliable indicator of the cash balance. Money refers to the amount in hands
of the company in physical form and kept in bank. It is available to the business through
investment received, sales and incomes and it deceases with expenses, purchases and payments.
When all these things happen in cash or is realised in cash then, they are involved in money.
Whereas, talking about Profits, it is no dependent on cash. The profit in accrual system does not
depends on whether the things has happened in cash or not. It just gives importance to the fact
that transaction should be related to that period and is relevant to be recorded in records. The
entries which are related to cash but are not incurred in money are also accounted in it (Douma,
2018).
According to mathematical expression, profits is equal to income minus expenses. But is
does not introspect that whether all these expenses and incomes have taken place in real
monetary form or not. So, profits made by business is not a reliable indicator of cash holdings of
business. This means that firm showing high level of gains, may not be having much amount of
money resources. This is solely due to the nature of profits to consider non-cash transactions into
it.
Difference between cash and profits:
 Cash balance involves the amount held by firm after paying and receiving of money from
all activities – investing, operating as well as financing. While profits deals in only
operating actions.
 Profits includes all cash and non-cash items, while cash includes only those entries that
has took place in money only.
 Profits does not show the actual liquidity of business, but cash shows and presents the
money holdings of business and helps in interpreting its actual position.

 Cash is the amount available to the business in order to use by the business in the
business operations of the company. Profits are the portion which is share to the owners
of the company and used by the owners of the company.
On the whole, it a can be said that a business cannot rely totally on its net income, it has
to give equal importance to cash flow of its business. Ignoring this aspect can make a big distress
in the company (Francis, 2022).
Differentiate between:
a) Capital Expenditure and revenue expenditure
Capital expenditure is the money spent by a firm to acquire assets or to improve the
quality of existing ones. These expenses are incurred for the long term and are capitalised and
stated in firm’s cash flow statement. These expenses are non-recurrent in nature. The yield of
these expenses is not limited to a year and is usually long term in nature.
Revenue expenditure is that money which is spent by entities to its meet day to day
operations. These expense are incurred for a shorter duration confined to an accounting year and
are not capitalised. It is stated in Income statement and are recurring in nature (McKenzie, 2021).
b) Expenses and Drawings
Expense refers to day to day running costs incurred in an enterprise such as rent, heat and
light, insurance, wages etc. These expenses are debited from gross profit in the Profit and Loss
account.
Drawings is the term used for amount withdrawn from the business for the owners own
use. Although it is different from wages as the owner is not an employee of the concern and they
can withdraw amount of their choice. These withdrawals are deducted from the owner’s capital
in the balance sheet of the organisation.
c) Gross profit and Net profit
Gross profit is the amount business made during a period after deducting the cost of
goods sold. The cost of goods sold consists of materials purchases, labour expenses incurred, etc.
All the sales in an accounting period are considered while calculating total sales.
The total amount earned from revenue after excluding the cost of goods sold and other
operating expenses. The expenses include operating expenses, taxes, interest, and selling

expenses. It is also referred as the bottom line because it is recorded at the bottom of the income
statement. It can be obtained after excluding all the expenses incurred in that particular period.
d) Cash Budget and Cash Flow Statement
Cash budget is an elaborated plan revealing how cash resources will be acquired and used over a
specific period. It represents the expected cash inflow and cash outflow. It is easy to understand.
It constitutes the minimum amount of cash balance which a firm must have to meet its cash
needs. It is commonly prepared for a shorter time span, namely, daily, weekly, monthly, half-
yearly etc (Mills, 2018).
Cash Flow Statement is a comprehensive study or representation showing how cash
resources will be obtaining and utilised over a particular time period. It is a predominant external
statement which consists of the sources of cash and represents cash utilisation. It is prepared for
a long period, generally yearly.
e) Accruals and Prepayments
Accrued Expense that are associated to the current period have not yet been expensed and
did not materialize in the balance of expense. This expense is acknowledged in the profit and
loss account and is shown in the balance sheet of the company in the liabilities side.
Prepayments incurred during the current period but related to the next accounting year.
Consequently, these expenses are deducted from the expenses balance shown in the Income
statement. It is shown in the balance sheet as an asset of the Company.
Explain the below terms:
a) Asset: It is a measure which have an economic value that a sole trader, business firm,
or nation owns or rule with the anticipation that it will furnish a forthcoming
advantage. These are recorded in an organisation's balance sheet and are acquired or
generated to uplift a concern's worth or benefit the firm's functioning. It can create
cash flow, cut down expenses, or upgrade sales (Nagel and et.al., 2019).
b) Liabilities: It is that amount which a persons or company has to repay. These are
discharged over time through the reallocation of economic benefits consisting of
funds, commodities, or services. These are reported on the credit side of the balance
sheet. It includes debt, creditors, security interest, deferred revenues, bonds,

warranties, and outstanding expenses. These are recorded in an opposition to assets. It
also means a lawful or regulative risk.
c) Ordinary Shares: These shares are also known as common shares and are considered
as a stock sold on public exchange. Each and every share of the prescribed stock
provides its owner or holder the right to vote at a stakeholder's meeting in an
organisation. Although, the holders of these shares are not guaranteed a dividend just
like the holders of preference shares. The shareholders of ordinary shares will receive
dividend after the payment of dividend to preference shareholders (Rissing, 2019).
d) Preference Shares: These are generally known as preferred stock. These are those
shares of an entity on which dividends are paid before paying dividend on ordinary
shares. In case of liquidation of a company, the stakeholders of preference shares are
entitled to receive dividends before the shareholders of equity shares. In most cases
preference shares have a fixed dividend in comparison to ordinary shares. Their
shareholders do not exercise voting rights in the shareholders meeting of the
organisation.
e) Dividend: It is an allocation of profits of an organisation to its preferential and equity
shareholders. When an entity earns a surplus, it becomes capable of paying a portion
of its profit as dividend to the stockholder of the company. It is declared by the
company over a period of time. It is of two types namely: final dividend and interim
dividend.
f) Stock Exchange: It is an exchange where a stock trader can buy and sell securities. It
is also termed as securities exchange or bourse. It includes shares of stocks, bonds
and other financial instruments. It also renders facilities for issue and redemption of
securities. Initial public offering or IPO of stocks and bonds is furnished in the
primary market and subsequently trading is done in the secondary market. It is
authority which is responsible for all the transactions incurred in the country, they are
very limited in number and licensed by the government of the country.
g) Venture Capital: It is a type of personal equity and fund that is provided by investors
to start-up companies and mid cap businesses that are expected to have a potential to
exist in the long term. It usually obtained from well-established investors, investing
and other financial establishments. Although it is not always represented in economic

terms, it can also be processed in the form of technical and managerial proficiency
(Russell, 2019).
h) Budget: An evaluation of incomes to be earned and expenses to be incurred in a
particular future time period is referred to as budget. It is generally organised and
reassessed periodically. It can be prepared for individuals, group of individuals, an
entity, a regulating government. It is a financial plan prepared for a particular period
of time. It involves estimated sales volume and revenue from such sales, costs and
expenses to be incurred, cash inflows and outflows and assets and liabilities. It is
prepared to know the budgeted expenses of the company during the fiscal year.
i) Capital Income: An income which is derived from the capital or wealth instead of
production process of an organisation is referred to as capital income. It consists of
stock dividends and capital gains. It arises from passage of time of an asset not from
utilisation of an asset.
j) Company: A legal entity which represents an association of people irrespective of the
fact that they are natural, legal or combination of both. The members of the company
work on a common purpose to achieve a particular and determined goal. The liability
of the members of the company is limited. It is an artificial person created by law
with a perpetual succession and a common seal in the name of the company.

REFERENCES
Books and Journals
Douma, M.J., 2018. A Paper World: Before Finances Went Digital. In SAGE Business Cases.
SAGE Publications: SAGE Business Cases Originals.
Francis, R., 2022. Three simple tips to help you master your small business finances in
2022. Irrigation Australia: The Official Journal of Irrigation Australia, 38(1), pp.58-59.
McKenzie, D., 2021. Small business training to improve management practices in developing
countries: re-assessing the evidence for ‘training doesn’t work’. Oxford Review of
Economic Policy, 37(2), pp.276-301.
Mills, K.G., 2018. Fintech, small business & the American dream: How technology is
transforming lending and shaping a new era of small business opportunity. Springer
International Publishing.
Nagel, H and et.al., 2019. The effect of a tax training program on tax compliance and business
outcomes of starting entrepreneurs: Evidence from a field experiment. Journal of
business venturing, 34(2), pp.261-283.
Rissing, A., 2019. “Profitability” vs.“Making It:” Causes and consequences of disembedding
beginning farms’ finances. Culture, Agriculture, Food and Environment, 41(2), pp.149-
157.
Russell, M., 2019, April. How practice finances work. In BSAVA Congress Proceedings
2019 (pp. 300-300). BSAVA Library.