How to Measure Profit and to Know Its Important over Cash

Topics: Income statement, Generally Accepted Accounting Principles, Balance sheet Pages: 4 (1526 words) Published: March 25, 2012
How the profit measured and is it more important than cash?
In the work I reveal to the concept of profit, discuss how the profit measured, analyse cash flow and conclude is it more important than cash or not. Essay includes such key concepts as revenue, expenses, profit, loss, a profit and loss account, balance sheet.

According to Meckin (2007) ‘the objective of financial management in the majority of businesses is to take business idea and turn it into profit’. And we also need to understand the importance of cash flow. As Meckin (2007) mentioned ‘there are two essential criteria for a regular trading business to survive: 1. It must generate profit. 2. It must generate cash flow’. It is very important not to mix these two key concepts and differ them from each other. Profit is calculated by identifying the sales in a period and deducting the costs incurred to produce that period’s sales. Cash flow is calculated by identifying cash received in a period and deducting the cash paid out in the same period. ‘Business exists for the primary purpose of generating wealth, or profit, and it is the profit generated during a period which is the primary concern of many users. Also the amount of profit generated is of particular interest to the owners of a business, other groups such as managers, employees and suppliers will also have an interest in the profit-making ability of the business. The purpose of the profit and loss account is to measure and report how much profit (wealth) the business has generated over a period.’ (Atrill, 2008) Main Part

There are a lot of different definitions of profit and according to Gowthorpe (2005) ‘profit measures changes in wealth. When a company states it has made a profit, it is not saying it has more cash, it is saying its wealth has gone up. In other words, it owns more.’ To analyse how to measure profit we should first understand some definitions such as revenue, expenses, profit, loss, a profit and loss account...

References: 1. Atrill, P. & McLaney, E. (2008) Accounting and finance for non-specialists 6th Ed. FT Prentice Hall
2. Dyson, J.R., (2007) Accounting for non-accounting students. 7th Ed. FT Prentice Hall
3. Gowtherpe, C. (2005) Business accounting for non-specialists. 2nd Ed. Thompson Learning
4. Meckin, D. (2007) Naked Finance: Business finance pure and simple. Nicholas Brealey Publishing
5. Jones, M. (2010) Accounting. 2nd Ed. John Wiley & Sons Ltd. (?)
6. Giles, R. (2001) Business Accounting. 2nd Ed. Stanley Thornes Publishers Ltd (?)
7. Wild, J., Subramanyam, K., Halsey, R. (2003) Financial statement analysis. 8th Ed. McGraw Hill
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