IB Business Management SL 3.7.1 Profit and Cash Flow Topic Practice

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. Cash flow reflects the actual movement of funds - when a business receives payment and makes a payment. Thus, a timing difference can exist between the accrual of a revenue or an expense and the actual receipt of funds.

Award [1] for partial understanding and explanation and [2] marks for a complete understanding and explanation. A candidate does not have actually to use the word accrual, but they must convey understanding of a timing difference between the profit and loss account and the cash flow.

An alternative way that a candidate can earn [2] is by defining profit (revenue minus expenses) and then explaining 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 and outflows.