Accounting Cash Flows Essay

Question 2.2 score and property Flows Why is it that the revenue and live figures shown on a cadence income account may non be representative of the actual coin in liquefys and verboten prevails that occurred during a level?Financial Statements atomic number 18 prepargond according to assemblage rule of , according to which cost and revenue ar recorded as they occur and non when they are actually received or paid. This is why exchange flows during the year may be different from revenue and be in income asseverations. Different companies use different policies to pay the costs and hear 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 identical time. Typically involveion of revenue does not happen at the similar time of delivery.See more than Examples of satire in adventures of huckfinn essayAs I reflect on managerial accounting, I recall that many 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 determine versus Market Values In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than grocery value? When comparison book value to market value it is simply what the firm paid for the item versus what the firm could divvy up the items on the market.Book values are apply because they arrive at 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 exchange Flow In comparing accounting sort out income and ope proportionalityn coin flow, what two items do you recollect in make income that are not in operating funds in flow? con male parente what each is and why it is excluded in opera ting gold flow. Operating interchange flow is revenues minus the costs, except for depreciation and finance interest, because neither of these is paid in hard funds.Cash flows are important because the bills flow reflects, basically, whether a companions outflows of cash can meet their inflows of cash. Net income does acknowledge financing interest and depreciation, because all liabilities need to be accounted for. Question 3. 4 Financial proportions Fully explain the kind of in readyation the following pecuniary dimensions provide about the firm. Many companies use financial proportions to avoid problems with comparing companies of different sizes.A dissolute symmetry is also known as acid-test and is an indicator of a come withs short-term liquidity. Furthermore, the quick ratio measures a corporations ability to meet its short-term obligations with its around liquid assets. The higher the quick ratios the better the side of meat of the company. A quick ratio is calculated as follows Quick Ratio = Current Assets Inventory Inventories / Current Liabilities As notes in our text, the using cash to buy inventory does not affect the current ratio, tho it reduces the quick ratio.The idea is that inventory is relatively illiquid compared to cash. (Ross, Westerfield, Jordan, p. 57) A cash ratio equals cash divided by current liabilities. The ratio of a companys total cash and cash equals its current liabilities. The cash ratio is most commonly employ as a measure of company liquidity. It can determine if, and/or how quickly the company can retaliate its short-term debt. A strong cash ratio is recyclable to creditors when decision devising how much debt, if any, they would be go awaying to extend to the suck ining starty. (Investopedia. om) Furthermore, the cash ratio is generally a more conservative look at a companys ability to cover its liabilities than many other liquidity ratios. Mainly, due to the fact that inventory and accounts r eceivable are left out of the equation. Since these two accounts are a large part of many companies, this ratio should not be used in determining company value, but simply as one factor in determining liquidity. Finally, the pileus intensity ratio is a ratio measures the ability of a company to stiffly use its assets.Simply put, gravid intensity shows how much of an enthronization in fixed assets was required during a given period to pay hold $1 of sales revenue. The actual ratio formula to measure capital intensity is total assets divided by sales revenue for a specified period. One of the major problems with ratios is that different organizations and different sources often dont compute them exactly the same way, which lead to confusion and absurd results. The definitions are vague and when comparing to others equations, you may find significant results depending on the way they are computed.Accounting Cash Flows experiment derriere Stacey, a sales engineer for Aldhus Corp oration, was worried. A flight live had caused him to miss last weeks accounting straighten out in the evening MBA program in which he had enrolled at the suggestion of the power director at Aldhus, a growing manufacturer of computer peripherals. The kinsfolk he had missed had been devoted to a lecture and discussion of the statement of cash flows, and he was sure the material he had missed would be covered in the weekly quiz that was part of each class session.A classmate had faxed Stacey both(prenominal)what notes distributed by their instructor, but they were too cryptical to be understood by anyone who had missed the class. In desperation, prat called Lucille Barnes, the jock controller at Aldhus, to ask if she could take a few proceeding to point him in the right direction toward understanding the statement of cash flows. She look outmed delighted by the request, and they agreed to meet that afternoon. op The Meeting At 200 P. M. John Stacey went to the office of Luci lle Barnes with his notes and questions.After they had exchanged greetings, Lucille handed John terzetto cash flow statements from the annual reports of other high-technology companies (Exhibits 1, 2, and 3). John was worried that Lucille would ask him to explain them, and that she would see how confused he still was about about aspects of accounting instead, Lucille began explaining. Lucille Barnes (Assistant Controller) The statement of cash flows is in truth a very useful part of the set of three statements companies are required to prepare. In some cases, it tells more about what is actually happening in a tune than either the balance sheet or income statement.The statements of cash flows that I corroborate given you are very revealing. Let me give you a outline overview of the structure and content of cash flow statements, and then you take some time to study these statements. I have prepared some questions to hire your study. Then, we can meet again tomorrow to discuss what you have hale-educated and to answer any questions that remain. I do not think you have to worry about your next quiz because if you understand how balance sheets and income statements are prepared, much about the statement of cash flows will seem sensibly obvious.John Stacey I hope you are right. I really manage the accounting course, and I want to do well in it and to really learn the material. Thats why I panicked when I could not understand the notes our instructor passed out last week. Professors Julie H. Hertenstein and William J. Bruns prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1993 by the chairperson and Fellows of Harvard College.To order copies or request consent to reproduce materials, call 1-800-545-7685, spare Harvard Business School Publishing, Boston, MA 02163, or go to http//www. hbsp. harvard. edu. No part of this publication may be rep roduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. copy or posting is an infringement of copyright. Permissionshbsp. harvard. edu or 617-783-7860.Statements of Cash Flows Three Examples Lucille Barnes Forget those notes for a while and just concentrate on studying the statements I have given you. Notice that the statement of cash flows is divided into three pieces operating activities, consecrateing activities, and financing activities. Each section shows the cash inflows and the cash outflows associated with that type of activity. Operating activities shows the inflows and outflows related to the fundamental trading operations of the basic line or lines of business that the company is in.For example, it would include cash receipts from the sale of goods or services and the cash outflows for purchasing inventory, and stipendiary wages, taxes and rent. investment funds activities shows cash flows for the purchase and sale of assets not generally held for resale and for the making and collecting of loans. (Maybe it should more appropriately be called the investing and disinvesting activities section. ) Here is where you would see if the company sold a building, purchased equipment, made a loan to a subsidiary, or purchased a piece of equity in its supplier.Finally, financing activities shows the cash flows associated with increasing or decreasing the firms financing, for example, issuing or repurchasing stock and borrowing or quiting loans. It also includes dividends, which are cash flows associated with equity. However, ironically, it does not include interest payments these are included in operating activities. John Stacey That seems strange to me. Since loans are the reason interest payments are made, why are they not included in the financing activities section? You know, interest is to loan s as dividends are to equity?Lucille Barnes Actually in some other countries much(prenominal) as the United Kingdom interest is included in the financing activities section But in the United States the Financial Accounting Standards wag voted that interest payments should be in the operating activities section instead. This is one of these situations where you office have to do some adjusting if you were trying to compare a U. K. company like British Petroleum to a U. S. company like Exxon. John Stacey That is interesting How can I use each section of the statement?Lucille Barnes The operating activity section is the cash-flow engine of the company. When this engine is working effectively, it provides the cash flows to cover the cash needs of operations. In a healthy, growing company, we would yield growth in operating working capital accounts such as inventory and accounts receivable (uses of cash) as well as in accounts account payable and other operating payables (sources of cash). Obviously there can be quite a bit of variability in working capital accounts from period to period, but on average inventories, receivables, and accounts payable usually grow ingrowing companies. In addition, this operating cash-flow engine provides cash for needed investments, to repay debt, and to pay dividends. There are exceptions, of course. Start-up companies, for example, usually have proscribe cash flows from operations because they have not gotten their cash-flow engines up to speed. Companies in cyclical industries may have negative operating cash flow in a down year a company that has experienced an extensive strike could also be expected to have negative cash flow from operations.Although an occasional year of negative operating cash flow does not spell disaster, nonetheless, we should expect operating cash flow, on average, to be positive. Investing activities are a different story. Whereas we expect positive operating cash flow, we also expect a healthy compa ny to continually invest in more plant, equipment, land, and other fixed assets to replace the assets that have been used up or have become technologically obsolete, as well as to expand and grow.Although companies often sell assets that are no thirster of use to them, we would normally expect them to purchase more capital assets than they sell. As a result, in general, we expect negative cash flows from investing activities. desire operating activities, exceptions occur, especially if the firm divests a business or subsidiary. Copying or posting is an infringement of copyright. Permissionshbsp. harvard. edu or 617-783-7860. Statements of Cash Flows Three ExamplesCash flows from financing activities could as easily be positive as negative in a healthy company, and they are likely to change back and forth. If the companys need for cash to invest exceeds the cash flow generated by operating activities, this will require extra financing by debt or equity, therefore a positive financi ng cash flow. On the other hand, if cash flow from operating activities exceeds the investing needs, the firm will have excess cash to repay debt or pay more dividends, producing negative cash flows from financing.