Recognition of revenue occurs when earned as opposed to the receiving of cash; this is the revenue recognition principle. The incurrence of expenses also determines recording not receiving payment; this is the matching principle. One example of accrual basis accounting is a company buying new equipment and recording the purchase even if the equipment is not paid for at that time but at a later date. Cash Basis Accounting Generally used by small businesses, GAAP bars cash basis accounting. Recording of revenue occurs at the time receiving cash takes place.
( Unit 3 Answers to End of the Chapter Problems Chapter 7 The Asset Market, Money, and Prices Answers To Textbook Problems Review Questions 1. Money is the economist’s term for assets that can be used in making payments, such as cash and checking accounts. In everyday speech, people often use the term “money” to refer to their income or wealth, but in economics money means only those assets that are widely used and accepted as payment. 2. The three functions of money are (1) the medium of exchange function, which contributes to a better-functioning economy by allowing people to make trades at a lower cost in time and effort than in a barter economy; (2) the unit of account function, which provides a single, uniform measure
The computation of ratios facilitates the comparison of firms which differ in size. Ratios can be used to compare a firm's financial performance with industry averages. In addition, ratios can be used in a form of trend analysis to identify areas where performance has improved or deteriorated over time. Because Ratio Analysis is based upon Accounting information, its effectiveness is limited by the distortions which arise in financial statements due to such things as Historical Cost Accounting and inflation. Therefore, Ratio Analysis should only be used as a first step in financial analysis, to obtain a quick indication of a firm's performance and to identify areas which need to be investigated further Profitability.
Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life. a. True b. False (11-2) NPV and IRR F I Answer: b EASY [iv]. A basic rule in capital budgeting is that If a project's NPV exceeds its IRR, then the project should be accepted.
The statement of cash flows will summarize what would pertain to the cash coming in “(receipts)” and the cash that would be coming out “(payments)” over a particular period of time. Which financial statement is the most useful? I would think that since all four statements would pertain to the company that they are all equally important. Why? The income statement is important because it will show whether the company’s revenue exceeded expenses for a specific period resulting in net income or the amount the company may have lost because the expenses exceeded the revenue.
Two measures for evaluating a business's short-term liquidity are working capital and the current ratio. Working capital is the dollar amount of a company’s current assets less current liabilities as shown below: Working capital = Current assets - Current liabilities An excess of the current assets over the current liabilities implies that the company is able to pay its current liabilities. If the current liabilities are greater than the current assets, the company may not be able to pay its debts and continue in business. The current ratio is another means of expressing the relationship between current assets and current liabilities. The current ratio is computed by dividing current assets by current liabilities, as shown below.
Cash basis also records accounts payable the date that it was paid rather than the billed date. Those are the two main differences on how it reports monetary data, other differences are the type of businesses that would utilize the two different accounting basis. Smaller business would most likely use cash basis simply because it is easier to manage. One major benefit to cash basis is that it identifies more clearly cash on hand, but a major down side is that it paints a bad picture of the company’s services that it performs. It paints a bad picture because the business may collect zero revenues for a month and pay accounts payable during that month showing a loss of revenue while the next month they may pay zero accounts payable but receive two month’s worth of accounts payable, this would indicate that the company had higher than realistic earnings.
The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of a business's income and expenses. In most cases, you can choose which method to use. Learn how they work and the advantages and disadvantages of each so you can choose the better one for your business. In a nutshell, these methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts. Here's how each works: The cash method.
Also, incremental cash flows take other costs into account, if available. In this particular case, the information needed to figure out the incremental cash flow of the product was limited. However, if the information was available, it would be useful to figure out if the sale of this product took away from the sale of another Caledonia product. Incremental cash flows consider this and other circumstances such as opportunity cost. Year | Net Profit(units sold x price per unit) – ((units sold x
This method has been considered to be more appropriate to suite the complexity of today’s business world because it allows cash flows, whether inwards or outwards, to be combined with an expected future movement of cash thereby providing a more accurate representation of a firm’s financial condition. In other words, accrual accounting is based on the understanding that if an economic transaction takes place the movement of cash that represents that transaction must subsequently follow sometime in the future, therefore accrual accounting effectively disregards the fact that the cash can be received tomorrow or in a year’s time thereby recoding economic transactions as they occur. Today accrual accounting dominates the accounting arena even though it is relatively a complex