Question 2 - written

Question 1

Why is Cash Important?

Answer 1

1. Keeps business running – Cash is needed for everyday expenses like wages, bills, and suppliers.
2. Shows liquidity and solvency – Cash flow reveals if a company can meet short-term debts and survive long term.
3. Supports growth – Strong cash flow allows investment and expansion without relying on loans.
4. Aids decision-making – Investors and managers use cash flow to judge financial health and make informed choices.

Question 2

The Importance of Cash Flow and the Difference Between Profit and Cash

Answer 2

“Cash is king” – Profit matters, but cash shows the true financial health of a business. That’s why IAS 7 requires the Statement of Cash Flows — to highlight how cash is generated and used.

Question 3

Profit vs Cash – Summary

Answer 3

• Profit is the difference between income and expenses (including non-cash items), based on accrual accounting.
• Cash is the actual money flowing in and out of the business.
• A company can be profitable but run out of cash, or have cash but make a loss — so both need to be assessed together.