Question

Explain the following briefly with your own words. (max 200 words for each.)

Assume as if you are explaning the matter to one of your colleagues who did not take acc. & finance course.

• 2) Why does the Cash and Banks balance not include the profits in most cases?

Answer 1

When a business is created and carried out by its owners, named shareholders in case of corporations or proprietor in case of individual business firms or partners in case of partnership firms, etc., their primary objective will be to earn profit except not-for-profit organizations as their primary objective will be to serve people and not earn profit. The business cycle starts with initial investment by promotors. In this case, firm's cash and bank balance will be positive as it received cash from investors but profit will be zero because firm has not yet started selling any products or rendering any services. Here, Cash and Banks balance does not include the profits. Once the business is started, firm may borrow funds from public through debt instruments or from bank through loan, etc., In these case also, it received cash from public or bank (as the case may be) but profit will be zero because firm has not yet started selling any products or rendering any services. Here, Cash and Banks balance does not include the profits. Firm sells products to customers for $100,000 but the cost of goods sold was $120,000. As it is the first sales order or for any other reason, firm was forced to sell it at less selling price than its cost of goods sold. As a result, firm sufferred loss of $20,000. Firm has collected cash from customers $100,000 fully. Now, firm's cash and bank balance will be $100,000 but profit will be negative $20,000 (= loss). Here, Cash and Banks balance does not include the profits.