This means that it is reasonable to expect cash is to be received at a later date, though service has already been performed. Expenses in accrual accounting are recognized at the time when the related revenue is recognized this is also known as matching principle. The accrual method makes it possible for cash inflows and outflows to be joined with expected cash inflows and cash outflows, which paints a definitive picture of a company’s current financial condition. Accrual accounting is the preferred method of accounting, as it relates to GAAP. Cash basis accounting is very different from accrual basis accounting, because it recognizes income only when payment is received and expenses when they are made.
• A financial asset is considered to have value if it has the ability to generate positive cash flows. • A financial asset is considered to have value if it is acquired at its market value • A financial asset is considered to have value if it is acquired a its book price. When determing the value of a firm, which of the following statements is true? • The timing of cash flows a firm can generate is very important in determing the value of a firm. All else being equal, cash received sooner is better.
Generally, free cash flow is cash flows provided by operating activities less cash flows used by investing activities for the purchases of plant, property and equipment and the repayment of long-term debt. If there is cash left over, it is “free” to be distributed to the owners of the entity or reinvested in the business. Over time, the entity that generates the highest free cash flow will be the most successfully financial company in terms of return on the owners’ investments. There are generally a number of differences between cash provided by operating activities and net income. The most obvious differences are that net income is presented on an accrual basis and that net income includes non-cash expense and income items.
Net initial investment outlay which is investment cash and the sale of old equipment cash expenditures as well as net cash flows. Net salvage value which is the after tax net cash flow projects businesses will not use. The incremental cash flows are different because of the way Caledonia operates with the cash. 3. What is the project’s initial outlay?
( 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
because the Emission and the cost of emission allowances have indetermination lives and inherent in a continuing business , the emission allowance is recognized as expense when incurred. In conclusion: If the emission allowance is recognized as expense when incurred , expense is noncash item, it is reconciled net income in the operating activities so that the
Both methods can be used, but the company should choose which method would be a good fit for their company. Cash basis accounting method is strictly cash in, cash out basis. This means that financial transactions are recorded only when money is given or paid (Kimmel, Weygant, & Kieso, 2009). Cash basis is used mostly by small business where owners want a simple way of understanding their financial statement just to see if there is a profit or loss in the company. The income and expense is more accurate (“Cash Basis”, 2004-2013).
Nonetheless, Dell has a few reservations about illogical and impractical approaches proposed by the board. The company believes that stock options award should be regarded as compensation; however this understanding should not be exposed as an expense to the company, once this type of compensation is related to an equity distribution rather than using the company’s assets. Concerning the fair value, Dell does not agree with the presented methods of how to measure the fair value. For example, the lattice model would interfere with the understanding of the subject by the user of financial statements. Another disagreement between FASB proposal and Dell believes is related to the method of accounting for income taxes.
Cash Connection began by operating as a financial service company, originally offering payday-advance loans before expanding operations to include prepaid phone cards, money orders, bill payment services and Western Union. The initial objective of this company was to offer easily accessible and expedited loans to families or individuals in need of financial assistance in order for the borrowers to cover their short term and unexpected expenses without falling into debt.While there may have been a high demand for such a service, skeptics argue that many of the customers were taken advantage of; a typical borrower is described as having mid level income, average education, within the working-class, with young families. Offering these services come with high risk, and therefore may have justified the steep repayment prices, but others argue that this created a vicious cycle for many. Positioned on the opposite end of the spectrum, supporters of Cash Connections methods may legitimately suggest that its services have positively impacted the nation's economic development.Each position has its consequences and offers its rewards, but in order to give strategic advice, the risks must be weighed against the benefits. Objectively, one may view Cash Connections business model as both ethical and beneficial to society overall, as it has offered large contributions to the economic well-being of the nation and its individual citizens.
Businesses may argue against the accrual method because the IRS requires them to pay income taxes on money they have not yet received (Account Receivables). (Alexander, S. (1999, July 5)). Another potential drawback to accrual accounting is that recording revenue before it is actually received is risky. The possibility exists for a prior sale to be unrealized if a company who bought your goods or services has a problem with their ability to pay or it may decide to go out of business completely. Then, you are stuck having to get in line with the other creditors and take them to court in the hopes to recover your losses.