Financial Accounting For Dummies. Maire Loughran
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Название: Financial Accounting For Dummies

Автор: Maire Loughran

Издательство: John Wiley & Sons Limited

Жанр: Бухучет, налогообложение, аудит

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isbn: 9781119758143

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      Other expenses are expenses the company incurs that aren’t associated with normal operations. Here are two types of expenses you typically see:

       Interest expense: The cost of using borrowed funds for business operations, expansion, and cash flow.

       Loss on disposal of a fixed asset: If the company loses money on the sale of an asset, you report the loss in this section of the income statement.

      Seeing an example of an income statement

An illustration of a simple income statement.

      FIGURE 2-2: A simple income statement.

      This section offers an overview of the statement of cash flows. You prepare the statement of cash flows using certain components of both the income statement and the balance sheet. The purpose of the statement of cash flows is to show cash sources (money coming into the business) and uses (money going out of the business) during a specific period of time. This information is used by investors and potential creditors to gauge whether the business should have sufficient cash flow to pay dividends or repay loans.

      

The statement of cash flows is very important for financial accounting because generally accepted accounting principles (see Chapter 4) require you to use the accrual method of accounting. This means that you record revenue when it is earned and realizable (regardless of when money changes hands), and you record expenses when they are incurred (regardless of when they are paid). On the flip side, when using the cash method of accounting, a transaction isn’t acknowledged until money changes hands. (A company may use a cash-basis statement for income tax return preparation.)

      Tracking sources and uses of cash

      I tell my students that if I could choose only one of the three key financial statements to evaluate a company’s ability to pay dividends and meet fiscal obligations (both of which indicate a healthy business), I would pick the statement of cash flows. That’s because even though the income statement shows eventual sources and uses of cash, the statement of cash flows gives you a better idea of exactly how a business is paying its bills.

      Not all cash is created equal. As a general rule, a business presents itself in a more positive position if its costs are being covered by cash it brings in from the day-to-day running of the business rather than from borrowed funds. As a potential investor or lender, I want to see that cash the company brings in through operations exceeds any cash brought in by selling assets or borrowing money. This is because selling assets and borrowing money can never be construed as continuing events the way bringing in cash from selling goods or services can be.

      

Financial accounting, which is done on the accrual basis (see Chapter 6), does not show the cash ins and outs of business operations. The statement of cash flows gives the user of the financial statements a better idea of cash payments and receipts during the year in two ways:

       By eliminating the effects of accounts receivable and payable

       By showing cash brought in by means other than the continuing operations of the business and cash paid out for items outside the scope of continuing operations — for example, for the purchase of fixed assets

      Studying sections of the cash flow statement

      There are three sections on a statement of cash flows: operating, investing, and financing. Each section addresses cash ins and outs that the business experiences under completely different circumstances:

       Operating: This section shows items reflecting on the income statement. The three big differences between the cash and accrual methods (see Chapter 6) will be accounts receivable, which is money owed to the company by its customers; accounts payable, which is money the company owes to its vendors; and inventory, which are goods held by the business for resale to customers.

       Investing: This section usually shows the sale and purchase of long-term assets. The purchase of long-term assets reflects on the balance sheet (see Chapter 7). The sale of long-term assets reflects both on the balance sheet and income statement (see Chapter 10): It reflects on the balance sheet as a reduction of the amount of assets the company owns, and on the income statement as a gain or loss from disposing of the asset.

       Financing: The financing section shows the cash effects of long-term liability items (paying or securing loans beyond a period of 12 months from the balance sheet date) and equity items (the sale of company stock and payment of dividends).

      Seeing a short statement of cash flows

An illustration of a very basic statement of cash flows.

      FIGURE 2-3: A very basic statement of cash flows.

      

There are two different ways to prepare a statement of cash flows: the direct method and the indirect method. I show you how to prepare a statement of cash flows using each method in Chapter 11. For now, here’s what to remember:

       The direct method reports cash receipts and disbursements.

       The indirect method starts with net income from the income statement and adjusts for noncash items reflecting on the income statement such as depreciation, which is allocating the cost of long-lived СКАЧАТЬ