Match the question to the record that can answer it. An income statement answers questions about profit, and a cash record answers questions about cash.
This lesson is part of performance beyond one ratio. It follows comparing ratios only when the periods and definitions align.
How do I match a problem to a record?
Write the question first, then find the record that contains the answer.
| Question | Record that helps |
|---|---|
| Was the business profitable? | income statement |
| Where did the cash go? | cash record of money in and out |
| How much do customers owe? | list of amounts owed by customers |
| What does the business own and owe? | statement of financial position |
| Which costs grew? | breakdown of expenses |
If the question names a problem your figures cannot show, the table points to what to ask for.
Worked example: Kedai Bintang
Kedai Bintang is a fictional shop. Its income statement shows sales of RM200 000 and a net profit of RM15 000 for the year. Its bank balance fell from RM20 000 to RM9 000.
Problem. Profit of RM15 000 and a fall of RM11 000 in the bank balance seem to disagree.
What the income statement cannot show. It shows profit but not when cash was received or paid. So it cannot explain the fall in the bank balance.
Records to request. First, a record of cash received and paid during the year, which would show whether cash from customers matched sales. Second, a list of amounts customers still owe.
What the records might show. Suppose RM16 000 of the sales were on credit and still unpaid at year end. The shop reported them as sales, so they increased profit, but it has not received the cash.
Suppose the shop also paid RM10 000 for new shelving, which is not an expense in the year but uses cash. Then cash changed by 15 000 − 16 000 − 10 000 = −RM11 000, which matches the fall in the bank balance.
The fall in cash is explained by unpaid credit sales and a purchase. The income statement alone could not show either.
The mistake that costs marks
The common slip is to explain a cash problem using profit figures only.
| Step | Wrong | Right |
|---|---|---|
| Problem | bank balance fell | bank balance fell by RM11 000 while profit was RM15 000 |
| Explanation | the shop made a loss | profit and cash are different, so more information is needed |
| Request | none | cash record and list of amounts owed |
| Reason | none | credit sales raise profit before cash arrives |
Profit is not cash, and the answer should say so.
Check yourself
A fictional bakery reports a net profit of RM9 000 and cannot pay a supplier’s bill of RM4 000 this month. Name one record to request and what it would show.
Answer
Request a record of cash received and paid, or a cash forecast for the coming weeks. It would show how much cash is in the bank and when money from customers will arrive.
A list of amounts owed by customers would also help, because it shows whether profit is tied up in unpaid sales.
What to study next
Read writing a qualified conclusion from limited accounting information to put this into words. Then try the integrated practice set.
The cash and profit transaction timeline shows how one credit sale affects profit and cash at different times. For a teacher to work through records with you, see online one-to-one Business tuition.