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Cash Vs Profit


Question 1 (10 marks) Rachel Green, the owner-manager of a small business, had carefully monitored her cash position over the past financial year, and was pleased to note at the end of the year that the cash position was strong and had shown a healthy 50% increase over the year. When presented with the income statement for the year, she was dismayed to note that the profit earned in the last year had deteriorated significantly and had become a loss for the current financial year. In her anger, she accuses you of having made errors in the accounting records since “such a silly situation could not possible exist”. Draft a response to Rachel.