Distinguish cash from profit.

Direct answer

The retailer’s profit of £5,000 is calculated after deducting all costs, including inventory purchases, marketing, and salaries. However, many of these costs were paid in advance or on credit, and sales revenue may have been received on credit as well. The £1,000 cash balance reflects only the money actually received and paid during the year, not the profit figure.

How it works

Profit shows the profitability of operations, while cash balance shows liquidity. Timing differences between when money is earned and when it is received or paid can create a gap between profit and cash.