Which statement best explains why a business can report accounting profit while experiencing a cash shortage?
Correct answer: B. Profit may include revenue not yet collected
- A. Profit includes only cash sales
- B. Profit may include revenue not yet collected
- C. Cash payments are excluded from accounting
- D. Non-current assets are treated as liabilities
Explanation
Under accrual accounting, revenue is recognised when earned even if the customer has not yet paid. A large amount of uncollected receivables can therefore produce profit without a matching cash inflow.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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