Dolvin And Miller

Question no. 1

Difference between profit and cash flow

(Jordan, Dolvin & Miller, 2015) defines profit as revenue after deducting the incurred expenses which is also called net income, where revenue includes total sales and any gains and cost & expenses includes cost of goods sold, salaries, maintenance, utilities insurance, rent, interest, transportation, depreciation. And cash flow is the difference between the actual cash that is received and the actual cash being utilized in the business. The cash may or may not be moved out from the business but profit is to ensure that business has made more earning than spending (Jordan, Dolvin & Miller, 2015).

In cash flow, revenues and expenses are recorded when the cash is actually trade off and
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But cash flow shows whether the cash is moved out or entered into the business. Profit figures does not clearly show the detail transaction of an investing and financing activities but cash flows record them. For instance, when a firm make a credit sells of $2000 whose cost was $1000, the profit of $1000 is recorded after paying $1000 to the suppliers and deducting other expenses. But cash flow shows inadequate cash in a firm since the debtor has not paid and there is only out flow not the inflow of cash. Profit measures ongoing sustainability of a company whilst cash-flow is a measure of the company's the ability of a company to pay its bills as they owe.

Importance of differences between profit and cash flow to the manager

It is very crucial for manager to differentiate between profit and cash flow when evaluating investment project to make the appropriate judgement of true figure of a project because of the following reason:

ϖ Company with more profit may go bankruptcy due to negative cash flow in short run
Slow paying customer show profit because suppliers want money earlier, staffs want wages and land lord wants rent as soon as possible but the debtor has not
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Below par value
This means, the bond is issued at discount as the bond is traded for less than the face value.
Value of bond
It can be explained as; the value of convertible security would be, if it was no longer convertible. It means value of bond is equals to the market value of bond less the value of conversion option. Conversion option is a feature of bond that allows to convert it into common stock. It is the cost for the benefit of conversion.
Maturity of bond
The time duration set at the time of issuing bond until the principle must return back to the bond holder by bond issuer is called time to maturity of bond.

Relationship between;

i. Yield to maturity and value of a bond
The value of bond is inversely related to changes in the yield to maturity. When market interest rates increase, the value of the bond decreases, and vice versa. When the market rate of interest increases, the yield to maturity of the bonds must also increases. However, since the interest payments on a bond are fixed, the only way for the YTM to increase is if the bond’s value declines (Titman, Keown & Martin,

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