A candidate can earn [1] by defining profit (revenue minus expenses) and then explain that cash flow is the movement of funds such as external financing (an inflow) or debt service (an outflow) or some other specific examples of inflows or outflows.
For a second mark [2], candidates must apply their response to the stimulus. Application must be more than nominal (just naming WC but otherwise providing a generic answer). Based up the stimulus, two opportunities exist for genuine application:
- The candidate refers to the $3 200000 profit and the $2 600000 cashflow
- The candidate refers to the product (dryers) when exemplifying how a timing difference can occur between sales and payment received (trade credit).
An alternate way a candidate can earn [2] is by explaining that profit is typically calculated on an accrual basis (when revenue or expense actually accrues to the business) but does not reflect the actual movement of funds. On an accrual basis, WC had a net profit of $3 200 000. Cash flow reflects the actual movement of funds - when a business receives payment or makes a payment. In 2022, WC had receipts in excess of payments in the net amount of $2600000. This difference between profit and cashflow reflects a timing difference between the accrual of a revenue or an expense and the actual receipt or payment of funds.