Lesson 1.3.3a

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

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 1.3.3a, Importance of cash and the difference between cash and profit: 20 multiple choice questions for the Pearson Edexcel GCSE Business (1BS0), Unit 3: Putting a business idea into practice, written with Revision Ninja.

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The 20 questions

  1. Why is cash important to a business?

    • It is needed to pay suppliers, overheads and employees as they fall due
    • It is needed only to record the value of the firm's assets each year
    • It is needed only to show profit in the annual accounts to shareholders
    • It is needed only to pay the owner's personal taxes at the year end

  2. What is the main difference between cash and profit?

    • Cash and profit are always the same figure in any set of accounts
    • Cash is only found in shares, while profit is held as cash in the bank
    • Cash is revenue minus costs, while profit is the money held in the bank
    • Cash is money available now, while profit is revenue minus costs over a period

  3. A business has a healthy profit but runs out of cash to pay its suppliers. How is this possible?

    • The business has no costs to pay, so its cash must be a mistake
    • Customers may pay late, so the profit is not yet turned into cash
    • The business has been paid in advance, so its profit is always lower than its cash
    • Profit can never be earned by a business that has any cash at all

  4. Which of these is the most likely consequence of a business running out of cash?

    • It will be able to pay all of its debts from its share capital
    • It will automatically make a higher profit in the following year
    • It may be unable to pay its bills and could become insolvent
    • It will never need to borrow money from any lender again

  5. What is insolvency?

    • Making a profit that is higher than the business's total revenue
    • Holding assets that are worth more than the owner's personal savings
    • Having more cash than the business needs for its daily operations
    • Being unable to pay debts as they fall due

  6. Which of these is an example of a cash outflow?

    • Receiving a grant from a local council for a new project
    • Receiving payment from a customer for goods sold on the day
    • Paying wages to staff at the end of the month
    • Receiving a loan from the bank in the first month of trading

  7. A business makes a sale on credit. Why does this not improve its cash immediately?

    • The sale is not recorded in the business's accounts until next year
    • The sale has been recorded as a cost rather than as revenue
    • The sale has reduced the business's total revenue for the period
    • The customer has not yet paid, so cash has not arrived

  8. Which of these best describes why a business must manage its cash carefully?

    • To make sure it can pay costs as they fall due even when profits are good
    • To make sure it can avoid paying any tax on its profits at all
    • To make sure it keeps the highest possible level of stock at all times
    • To make sure it never needs to report its results to the owner

  9. Which of these is an example of an overhead that a business must pay in cash?

    • Share capital invested by the owner at the start of the business
    • Profit retained in the business as a reserve for future expansion
    • Stock bought on credit from a supplier that is not due for payment yet
    • Rent on the business premises

  10. Why might a profitable business still fail?

    • It will always be protected by the government from paying its suppliers
    • It will always have more cash than its profit in every single year
    • It will never need to borrow money from the bank to fund its growth
    • It may run out of cash and be unable to pay its debts when they fall due

  11. Which of these shows the difference between cash and profit?

    • A business sells goods for £10,000 on credit, so it has profit but not yet the cash
    • A business pays £10,000 in cash for stock that it has not yet sold
    • A business has £10,000 in profit and also £10,000 in cash in the bank
    • A business receives £10,000 in cash but makes no sales at all in the period

  12. A business is considering whether to focus on cash or profit. What is the most sensible view?

    • Both matter, because profit shows performance and cash keeps the business solvent
    • Neither matters, because the business can rely on its suppliers to wait
    • Only cash matters, because profit is a figure that is not useful to owners
    • Only profit matters, because cash is simply a record of past transactions

  13. Which of these would increase a business's cash in the short term without changing its profit?

    • Customers paying their outstanding invoices sooner than before
    • Recording a larger sales figure in the accounts for the year
    • Writing down the value of the business's fixed assets
    • Increasing the number of goods sold on credit to new customers

  14. Why might a business with high sales still have a cash problem?

    • High sales mean the business is automatically protected from insolvency
    • Its costs may be paid before the money from its sales arrives
    • High sales remove the need for the business to pay any suppliers at all
    • High sales mean the business always has more cash than it can use

  15. Which of these is a benefit of a business keeping good records of its cash?

    • It can spot shortfalls early and take action before problems arise
    • It means the business will never make a loss in any period of trading
    • It means the business can avoid paying tax on its profits every year
    • It means the business no longer needs to pay any of its suppliers each month

  16. A business's total profit for the year is positive, yet its bank balance is negative. What is the most likely cause?

    • The business has been paid in advance for all of its sales
    • The business has no customers who buy anything on credit
    • Cash outflows have been timed ahead of cash inflows during the year
    • The business has no costs to pay during the year at all

  17. Which of these is NOT a cash inflow?

    • Receiving a loan from a bank into the business account
    • Receiving a government grant paid into the business bank account
    • Paying a supplier for raw materials used in production
    • Receiving cash from a customer for goods supplied

  18. A business has high profit but low cash because it has invested in new equipment. What is the best explanation?

    • Equipment is bought with profit, which is then converted back into cash
    • Buying equipment uses cash, but its cost is not all charged to profit in the same period
    • Equipment purchases are included in revenue, so they raise profit and cash
    • Equipment is always free to buy, so it does not affect cash at all

  19. Which action best helps a business protect its cash position?

    • Offering longer credit to all customers without checking their ability to pay
    • Paying all suppliers early and keeping no cash in reserve for emergencies
    • Chasing late-paying customers and negotiating longer payment terms with suppliers
    • Holding large amounts of unsold stock that uses up cash

  20. Which of these is the best example of a business having healthy cash but weak profit?

    • A business pays off every supplier early and reports a higher profit each year
    • A business reports large profit but has no cash in its bank account at all
    • A business receives a large loan but reports small sales and costs that exceed revenue
    • A business keeps all revenue as cash and has no costs to pay

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