Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days. For simplicity, assume there are no returns and no bad debts (i.e., bookstores pay on time). This year, Thomas shipped and billed book titles totaling $660,000. Collections, during the year totaled $603,316. The company spent $266,861 acquiring the books that it shipped. a. Using accrual accounting and the preceding values, show the firm's net profit for the past year. Sales Revenue............? Less: Costs...................? Net Profit......................? b. Using cash accounting and the preceding values, show the firm's net cash flow for the past year. Cash Inflow...............? Less: Cash Outflow.................? Net Cash Flow.....................? c. Explain why the accrual and cash accounting methods show different net profits. How do the two profit figures provide different information to the financial manager? (Select the best answer below.) A. The cash flow statement is more useful because it recognizes revenues at the time of sale (whether payment has been received or not) and recognizes expenses when they are incurred. B. The income statement is more useful because it recognizes revenues at the time of sale (whether payment has been received or not) and recognizes expenses when they are incurred. C. A financial manager will find the cash flow statement more useful. Accounting net income includes uncollected revenues that do not contribute to owner wealth. Cash flows, not accounting profits, matter to shareholders. The cash flow statement is more useful because it recognizes amounts that will not be collected and, as a result, will not contribute to the wealth of the owners. D. A financial manager will find the income statement more useful. Accounting net income includes uncollected revenues that do not contribute to owner wealth. Cash flows, not accounting profits, matter to shareholders. The income statement is more useful because it recognizes amounts that will not be collected and, as a result, will not contribute to the wealth of the owners.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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