1.3.3a Importance of cash and the difference between cash and profit Quiz: Pearson Edexcel Business, Unit 3

The 20 questions

1. Why is having sufficient cash essential for a business on a daily basis?

   • To pay bills
   • To avoid corporation tax
   • To boost share price
   • To pay dividends

2. What term describes the surplus of total revenue over total costs over a period?

   • Retained earnings
   • Working capital
   • Cash flow
   • Profit

3. Why might a profitable business suddenly experience a shortage of cash?

   • High asset depreciation
   • Customers paying late
   • Falling profit margins
   • Excessive bank interest

4. What is the most likely consequence of a small business completely running out of cash?

   • Tax exemption
   • Higher dividends
   • Insolvency
   • Increased borrowing

5. What term describes a business being unable to pay its debts when due?

   • Liquidation
   • Depreciation
   • Diversification
   • Insolvency

6. Which of these is a classic example of a cash outflow for a retailer?

   • Issuing new shares
   • Making credit sales
   • Paying monthly wages
   • Receiving bank interest

7. Why does making a sale on credit fail to instantly improve cash flow?

   • Taxes must be paid
   • Costs increase instantly
   • No profit is made
   • Payment is delayed

8. What is the main purpose of effective cash flow management in a firm?

   • Paying bills timely
   • Maximising gross profit
   • Reducing tax liability
   • Increasing share value

9. Which of these is a typical fixed overhead that must be paid in cash?

   • Delivery packaging
   • Commission on sales
   • Raw material costs
   • Monthly rent

10. What is the most common reason for a profitable business to fail completely?

    • Paying too much tax
    • Excessive net profit
    • High dividend payout
    • Running out cash

11. What financial transaction creates profit before any cash is actually received?

    • Making credit sales
    • Taking bank loans
    • Paying staff wages
    • Buying raw materials

12. Why are both cash and profit important for a business?

    • Performance and solvency
    • They are identical
    • Cash is enough
    • Profit is enough

13. Which action increases a business cash in the short term without altering profit?

    • Faster customer payments
    • Increasing product prices
    • Lowering staff wages
    • Selling extra stock

14. What is a primary reason a profitable business might still face a cash shortage?

    • Low selling prices
    • Timing differences
    • Excessive gross profit
    • High corporation tax

15. What is a key benefit of a business maintaining accurate daily cash records?

    • Spotting shortfalls early
    • Reducing corporation tax
    • Eliminating fixed costs
    • Increasing sales volume

16. What is the most likely cause of positive annual profit alongside a negative bank balance?

    • Low sales revenue
    • Excessive corporation tax
    • Cash timing mismatch
    • High variable costs

17. Which transaction represents a cash outflow rather than a cash inflow?

    • Selling shares
    • Collecting trade debtors
    • Paying suppliers
    • Receiving bank loans

18. Why might heavy equipment purchases cause low cash despite high profit?

    • Assets reduce revenue
    • Purchases use cash
    • Depreciation creates cash
    • Equipment has no value

19. Which strategy best helps a trading business protect its overall cash position?

    • Buying extra stock
    • Offering longer credit
    • Chasing late payments
    • Increasing advertising spend

20. Which transaction increases a business cash balance without improving its profit?

    • Inventory bought
    • Credit sale made
    • Bank loan received
    • Asset sold

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