Mba 9004 - Exam Paper

The two approaches have many aspects in common but there are two key differences that distinguish one from the other. The difference in cash accounting and accrual accounting is the way debits and credits are applied in bookkeeping. Cash based accounting recognizes income at the time it is actually received. This means that invoiced income is not counted as an asset until payment for the invoice is received. This approach is also used for debits and any expenses incurred are not posted until they are paid. Small businesses often time use the cash accounting because it is simple and easy. It is important to recognize that this type of accounting can complicate matters when the business is up for sale or a merger is offered. The type of accounting method used in any business should not be assumed.

a.) The income statement, also called the profit & loss account (P & L), is used to illustrate a company’s revenues and expenses over a particular period of time. It shows the net profit and/or loss for the given period (the difference between the business’ total income and its total costs). It also allows shareholders to see the performance of the business and if it has made an acceptable profit.

The cash flow (CFS) statement represenst revenue and expenses for a specific period of time (Sticker, 2012). . The CFS details exactly where cash is being derived and spent and may be generated at any time for analysis (Finkler, Jones, and Koyner, 2013).

The Cash or Cash Equivalents of the Cash Flow Statement groups cash records of inflows and outflows either increasing or decreasing the Cash Flow Statement (page 63). This is different form expenses and revenues because the exchanges of Cash or Cash Equivalents for a future payment are not yet recorded (accruals). Accruals is a

This Income Statement also known as the Earnings Statements or statement of operation, is one of the four Financial Statement used by accountants, business owner’s, and investors. The Income Statement provides a detailed look into how profitable a business has been over a designated period of time.

The net income is actually considerably different from the operating cash flow for multiple reasons. The first reason is non-cash expenses; these type of expenses are items such as depreciation or devaluing of something that was previously of higher value. Amortization of intangible assets, which is the steady reduction in recorded value of an intangible asset over time. These types of expenses truly do not require cash; outlays reduce net earnings but do not affect net cash outflow. Another imperative reason is that many timing differences occurring between the identification of revenue and expense and the incident of the underlying cash flow. In conclusion, the none operating losses and gains are used in the determination of net income, however, the associated cash flows are then classified as financing and investing activities, and they do not include operating activities.

It is important to understand that any business needs from an income statement and a cash flow statement to succeed and there are many reasons behind it. According to Southern New Hampshire University (2015), “Cash flow is the lifeblood of any business…it can reveal important clues about a company’s financial health that are not as readily apparent on the balance sheet or income statement. (p. 1)

The financial statements include profit-related elements such as operating cash flows from the statement of cash flows and retained earnings in the balance sheet the income statement shows the profit through the information it provides on net income during each year. There are different forms and different elements of income statement used depending on the company's business.

The official name for the cash flow statement is the statement of cash flows. The purpose of the cash flow statement is to gauge a company’s performance including strengths and weaknesses. The cash flow statement is also used with the balance sheet and the income statement to provide information about a company’s gross receipts and gross payments for a specified period of time which IS covered by the company’s choice. In addition to the cash amounts being reported as operating, investing, and financing activities, the cash flow statement must disclose other information, including the amount of interest paid, the amount of income taxes paid, and any significant investing and a financing activities which did not require the use of cash.

The financial statement of cash flow is typically used to recognize the firms’ ability to generate financial cash flow (Ross, Westerfield, & Jaffe, 2013).  The accounting statement of cash flow is a more detailed method of managing cash flow. It explains the changes in cash flow and the firm’s ability to pay off short term loans (Ross, Westerfield, & Jaffe, 2013).One major difference that can be pointed out is the interest expense. Interest paid should go under financing activities; however, accounting cash flow statement deducts it as an expense from the net income. Therefore, I would say that financial cash flow gives a more accurate picture of the cash flows

Income statement: has revenue, expense, gain and losses. The income statement represents the best effort of the firm’s accountants to match the relevant items of revenue with the relevant items of cost and expense for the period, a process which involves accrual accounting and extensive use of allocation of prior and future revenues and costs. Cash flow statements provide the most dynamic view of the expected changes in the company’s funding picture.

The assets the company has or owns must balance with the liabilities and the shareholder 's equity (Horngren, Harrison, & Oliver, 2012). The income statement, which shows the detailed costs and expenses associated with the company 's operations, reports how much revenue the company earned over the specific period of time the statement covers. The statement of cash flows report and show the detail inflows and outflows of cash. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash (Horngren, Harrison, & Oliver, 2012). Finally, the statement of retained earnings shows the amount of accumulated earnings that have been retained within the company during the reporting period, such as the fiscal year. At the end of each fiscal year-end, the amount of net income or loss is added to the opening amount of retained earnings to arrive at the closing retained earnings (Porter & Norton, 2011).

An income statement is designed to provide the data stating the “revenues generated and expenses incurred by a company over an accounting period” (Melicher, 2014). In providing this data to the managers and owners of the firm to assist in identifying the success of the company during the accounting period. The income statement identifies the gross profit, the operating income, the income before taxes, and the net income of the organization. This information allows analysts to determine the growth of the company during the designated accounting period.

The income statement provides valuable information about an organization. This financial report will tell the business if it was profitable over a given period. The income statement “measures a hospital’s profitability by

The financial statements analysis is very important to various users because it helps to express the overall financial health of the organization (Megan, Hategan, Caciuc, & Cotlet, 2009). Managers use the cash flow statements to determine the cash generated by the operating, investing and financing activities (Gibson, 2013). The statement of cash flow is a step by step presentation of cash inflows and out flows from the company’s operating, investing and financing activities, more so the statement demonstrates liquidity of an organization (Öztürk, 2015). The cash flow statement should report all transactions that affect cash flow. Investors and creditors are interested in the cash flow statement because are able to determine how much capital should be raised for investment, or if the company is able to meet its debt and pay dividends (Gibson, 2013). If no actual cash changes hands in a particular transaction, then the Cash flow statement does not change. This study presents a comprehensive description of the components of the statement of cash flows, the two alternative methods used to present the statement of cash flow, and a comparison between two cash flow statements of two companies; Nike and Tech Data Corporation.