Which of the following best describes the difference between cash and profit?

The distinction between cash and profit is fundamental in accounting, and identifying non-cash transactions is a key aspect of this difference. Profit is determined by the revenues earned and expenses incurred during a period, incorporating all transactions whether they involve actual cash movement or not. This means that profit can be affected by non-cash activities such as depreciation, amortization, and accruals, which reflect expenses or revenues that impact the profit and loss statements but do not directly involve cash.

This understanding illustrates why an entity can report a profit while still facing cash flow issues, as profits may be realized from sales made on credit, which do not immediately convert into cash. Therefore, observing non-cash transactions is vital for grasping how profit differs from actual cash flow in a business's financial health.