Question
In a hypothetical store, cash increased in period I even though profit was negative for the
quarter. How can that be?
quarter. How can that be?
Ask by Marsh Davies. in Cayman Islands
Mar 25,2025
Upstudy AI Solution
Tutor-Verified Answer
Answer
Cash can increase in a store even if profit is negative because of factors like cash sales, collections from past credit sales, selling excess inventory, receiving loans, selling assets, reducing costs, or getting tax refunds.
Solution
In a hypothetical store, cash can increase during a period even when profit is negative due to several factors. Here are some possible explanations:
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Cash Sales: If the store has a high volume of cash sales, it can generate cash inflow even if the overall profit is negative. This can happen if the store sells products at a lower cost than their selling price, but the total expenses exceed the revenue.
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Accounts Receivable Collections: If the store collects cash from previous sales made on credit, this can increase cash flow. Even if the current quarter’s operations are not profitable, cash inflow from past sales can lead to an increase in cash.
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Inventory Liquidation: The store may sell off excess inventory at discounted prices. While this may not contribute positively to profit (due to lower selling prices), it can increase cash on hand.
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Loans or Financing: The store might have taken out loans or received financing during the period. This inflow of cash can increase the cash balance despite negative profits.
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Asset Sales: Selling off assets, such as equipment or property, can generate cash. This cash inflow can lead to an increase in cash even if the store is operating at a loss.
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Cost Reductions: If the store has significantly reduced its operating costs (e.g., through layoffs or cutting expenses), it may still generate cash flow despite negative profits.
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Tax Refunds or Credits: The store may receive tax refunds or credits that increase cash flow, even if the current operations are not profitable.
In summary, cash flow and profit are distinct financial metrics. Cash flow focuses on the actual cash entering and leaving the business, while profit considers revenues and expenses over a specific period. Therefore, it is possible for cash to increase even when profit is negative.
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Explain 
Simplify this solution Beyond the Answer
Imagine a store that has just collected a hefty sum from an old customer who had outstanding invoices. Even though the sales for that quarter weren’t great (which impacted the profit negatively), this sudden cash influx boosts liquidity! It’s like finding a forgotten $20 bill in your winter coat—suddenly, your cash situation looks a bit brighter.
Another scenario could involve intense cost-cutting measures that led to immediate cash savings. Picture a store that renegotiated a lease, which resulted in lower rent payments. While profit may dip due to low sales, the savvy maneuvers in cash management kept the cash flow looking fresh and healthy!
