Cash Basis and Accrual Basis Cash basis is an accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred, rather than paid. The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle. It does not conform with the provisions of GAAP and is not considered a good management tool because it leaves a time gap between recording the cause of an action, sale or purchase, and its result of payment or receipt of money. It is, however, simpler than the accrual basis accounting and quite suitable for small organizations that transact business mainly in cash, which is also called cash accounting.
MULTIPLE CHOICE QUESTIONS 1. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
The significant difference between a market operation and the other methods of rationing is that the latter deal with real wealth, while markets deal with money wealth. Other methods of rationing deal directly with the actual things that are distributed. In market operations purchases and sales are usually made for money, not directly for other commodities or services. A market may be described in two ways, by its institutions and by its functions. As a group of institutions or elements, the market may be defined by looking at its components elements: private property and inheritance money wealth and income, the profit motive, standardized commodities, and an exchange of price information within geographic limits.
The reason is the information support by independent documentary evidence. Historical cost accounting figures are based on actual acquisition prices, not merely possible of market values that can be revised to affect the ratio analysis which improve the performance of financial results. That is, historical costs accounting provides an objective view of an entity’s performance. Thus it consider verifiable and reduces the risk of manipulation of figures by management. In contrast, if there is not active market, market value accounting requires the use of estimation subject to uncertain assumptions, personal judgment, and subjective information about future values, such as discount rates and allowance for doubtful accounts.
Accrual and Cash Basis Accounting Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Describe both bases of accounting and explain the differences. Cash basis is used mostly by small businesses where owners and creditors want a simple way to understand the financial statements. Cash basis is used when a company or creditors does not worry about the accuracy of the statements but just want to understand if there is profit or loss in the company. Revenues are recorded when cash is received and expenses are recorded when cash is payment.
The process of capital budgeting focuses on the incremental increase in cash flows associated with an investment decision or investment project. These cash flows are commonly analysed using a combination of analysis techniques such as Discounted Cash Flows, NPV, IRR and Profitability Index as well as Payback, Accounting Return on Investment and Discounted payback (Freeman and Hobbes, 1991, p37). In comparison with NPV, a most commonly used technique; real options consider multiple decision pathways, all of which aren’t necessarily apparent or available at the time of the initial decision. In essence, the NPV calculation does not value managements flexibility, so underestimates the value of a project. (Leslie & Michaels, 1997, p11) Examples of real options and the flexibilities they afford include • Option to abandon • Option to wait and see • Option to delay • Option to expand •
Cash bashes only records revenue when cash is received. Cash basis. Revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees. Accrual basis. Revenue is recorded when earned and expenses are recorded when consumed.
It appears not to be the case. Some could argue that the interest rates are not sensitive to the demand for money. Would an upward sloping LM curve still be applicable?. Explain your reasoning. The LM curve would not be applicable seeing as though the decision to reduce the federal funds is a monetary policy affect the IS curve solely.
The straight-line method spreads the expense evenly by periods and the accelerated methods yield higher depreciation expense in the early years of an asset’s useful life and lower depreciation expense in the later years while the units-of-production method, bases depreciation expense for a given period on actual use. Companies use different depreciation methods for tax reporting and financial reporting because every company has a different asset quality and the depreciation on those assets for each company depreciates differently so it is up to the management to be discrete to which choice of depreciation to use in their reporting in respect to their fixed assets. Straight Line method: Advantage: 1) Straight-line method allows for more “income smoothing". 2) It allows company to show more book value of the asset which increases the value of the company. Disadvantages: 1) benefit of Tax deduction is availed late.
In the service sectors, the cost saving from offshoring enables companies to create new service lines, many of which had been deferred for want of investment. New services increase customer satisfaction and become new revenue streams, as well as growth paths for companies. The geographic nature of offshoring brings its own advantages. It helps the company expand its reach, thereby helping the company grow. This growth mitigates any negative effects of offshoring.