In chapter 10 page 22 of the CMP, there is an example illustrating the effects of events on profit vs cash. Can you please explain why the answers below are true? a) the purchase of a non-current asset for cash (Answer: no change in pre-tax profits) e) an upward revaluation of inventories held (Answer: higher pre-tax profits)
Assets are things we own or things we are owed. If we use £10 of cash to buy £10 of some other asset, we haven’t made a profit or loss. We’ve just switched from owning £10 cash to £10 of the asset. If we revalue an asset we have (like inventory) then that impacts profit. This is because profits and losses are linked to changes in net assets (assets minus liabilities).
