quiz time

Cash or profit?

Profit is not cash! A profitable company can go bankrupt because it has run out of cash. Profit is the difference between income (sales) and cost (all the expenses incurred by a company). Cash is the money in the bank.

To start a company, one usually has to pay for deposits, starting costs, furniture etc. Not all of them are costs: deposits and furniture are assets, not expenses - deposits have to be eventually paid back to the company and furniture are valuables used for several years.

Another big difference between cash and profit is timing. If customers pay 30 days later, or if they buy a good that the company has bought several months earlier, in both cases, the company has paid first before receiving the cash.

Quiz

1. GAAP means:

a) generally accepted accounting principles

b) globally agreed accounting principles

c) generic accounting agreed process

2. A cash flow statement explains:

a) that profit is not cash

b) how much cash an investor can expect from a company

c) how much cash a company has generated

3. The working capital is:

a) the profit a company makes

b) the salaries due to the workers

c) the cash a company needs to run on a daily basis

4. Financial analysts calculate the acid test ratio to find out:

a) if a company complies with Hong Kong's pollution and safety regulations

b) if a company has enough money to pay for its short-term debts

c) if a company has enough money to pay dividends to its shareholders

Here are a few activities you can research on this week's topic:

1 Choose two companies operating in the same industry. Download their income statements and balance sheets and compare them: turnover, growth over one year, profit, profitability (profit as percentage of sales), debts. What can you see?

2 Choose another company from a very different industry - if you have already chosen a manufacturing company, select a service company for example. Find out the same pieces of information. How do they compare?

Answers

1. a, 2. c, 3. c, 4. b