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accounting problem, please help!!!

Question :

" Can you please explain to me how we have a healthy profit yet our bank overdraft has reached a record level?Surely there must be something wrong with the profit calculation isn't there?"

What approach should i use to answer this question? Please help!!!! :smile:

Reply 1

lubus

Profit does not equal to cash assets held. Trade receivables count towards profit, but the cash has not been received.

Consider this cashflow:

Starting positiong: 0
Sale of 500usd on 30 day credit
operating expenses of 200
Closing position: -200

Profit: 300

Reply 2

pmc:producer

Original post by Eudora

Original post by lubus

Trade receivables count towards profit, but the cash has not been received.

Yep. Look up 'accrual concept', that's what's happening.

If a firm is owed £1m, that £1m will be included in it's accounts - even if at the present time, the firm is maxing out it's credit to essentially survive.