accounting problem, please help!!! Watch

Eudora
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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!!!!
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lubus
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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
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pmc:producer
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(Original post by Eudora)
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!!!!
(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.
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collin95
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agree with lubus and pmcproducer
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