Assignment: Accounting Cash Flows
Individual Writing Assignment Week 1
Individual Writing Assignment Week 1
Question 2.2 – Accounting and Cash Flows: Why is it that the revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during a period?
Financial Statements are prepared according to accrual rule of , according to which cost and revenue are recorded as they occur and not when they are actually received or paid. This is why cash flows during the year may be different from revenue and costs in income statements. Different companies use different policies to pay the costs and collect revenues in current and subsequent years. In other words, the income statement assumes that once a good is sold, it is also paid for at that exact same time. Typically collection of revenue does not happen at the same time of delivery. As I reflect on managerial accounting, I recall that some companies only collect twenty-five percent the same month of the sale. Then, they collect the other fifty percent the month after and the final twenty-five percent two months after the sale.
Question 2.3 – Book Values versus Market Values: In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?
When comparing book value to market value it is simply what the firm paid for the item versus what the firm could sell the items on the market. Book values are used because they have a historical perspective associated with them. I understand from my readings that the book values are the “minimum” or worst case scenarios of what these items are worth.
Question 2.4 – Operating Cash Flow: In comparing accounting net income and operation cash flow, what two items do you find in net income that are not in operating cash flow? Explain what each is and why it is excluded in operating cash flow.
Operating cash flow is revenues minus the costs, except for
Individual Writing Assignment Week 1
Question 2.2 – Accounting and Cash Flows: Why is it that the revenue and cost figures shown on a standard income statement may not be representative of the actual cash inflows and outflows that occurred during a period?
Financial Statements are prepared according to accrual rule of , according to which cost and revenue are recorded as they occur and not when they are actually received or paid. This is why cash flows during the year may be different from revenue and costs in income statements. Different companies use different policies to pay the costs and collect revenues in current and subsequent years. In other words, the income statement assumes that once a good is sold, it is also paid for at that exact same time. Typically collection of revenue does not happen at the same time of delivery. As I reflect on managerial accounting, I recall that some companies only collect twenty-five percent the same month of the sale. Then, they collect the other fifty percent the month after and the final twenty-five percent two months after the sale.
Question 2.3 – Book Values versus Market Values: In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?
When comparing book value to market value it is simply what the firm paid for the item versus what the firm could sell the items on the market. Book values are used because they have a historical perspective associated with them. I understand from my readings that the book values are the “minimum” or worst case scenarios of what these items are worth.
Question 2.4 – Operating Cash Flow: In comparing accounting net income and operation cash flow, what two items do you find in net income that are not in operating cash flow? Explain what each is and why it is excluded in operating cash flow.
Operating cash flow is revenues minus the costs, except for
References: Ross, Westerfild, Jordan. (2011). Essentials of Corporate Finance. (7th edition). McGraw-Hill. http://www.investopedia.com/terms/q/quickratio.asp