State the effect on profit and cash of a firm paying a trade creditor.

Question

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When a firm pays a trade creditor, it reduces the cash balance of the firm. This is reflected in the cash flow statement as a decrease in cash. However, there is no immediate effect on profit. The cost of the goods or services purchased on credit would have already been recorded as an expense in the income statement when the purchase was made, regardless of when the payment is actually made. Therefore, there would be no impact on profit when the payment is made.

State the Effect on Profit and Cash of a Firm