The statement of cash flows is one of three very important financial reports that managers and investors look at when analyzing a companyâs past or present financial status. The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business, but the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can actually be much more important than income, profits, assets, and liabilities put together, especially in the early stages of any company. The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top Continue reading
Financial Accounting Concepts
Evaluate a Businesses Overall Financial Performance Using Profitability Ratios
An accounting ratio is made by dividing one accountâs transactions into another. The aim is to achieve a comparison that is easy as well as beneficial to clarify. Evaluate ratios for one Industry enterprise over several years. A graph of the ratio may allow a long-term trend. The same ratio is from many firms of similar size in the same industry. These ratios are used to assess performance and, with other data, forecast prospect profitability. Along with that is the future viability in addition to the soundness, which will repay loans as well as credit, additionally pay the interest along with dividends. Since profits are divided amongst shares, the profit per share indicates a possible dividend. While profitability ratios âevaluate a businessâ overall financial performance through appraising its capability to produce revenues in surplus of service costs as well as other expenses. There are at least four profitability ratios, which Continue reading
Advantages and Disadvantages of Different Sources of Finance
Finance is essential for a businessâs operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external.  It is also crucial for businesses to  choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. 1. Personal Savings This is the amount of personal money an owner, partner or shareholder of a business has at his disposal to do whatever he wants.When a business seeks to borrow the personal money of a shareholder, partner or owner for a businessâs financial needs the source of finance is known as personal savings. Advantages; The owner would not want collateral to lend money to the business. There is no paperwork required. The money need Continue reading
Positive Accounting Theory
The beginning of positive accounting theory is the Efficient Markets Hypothesis (EMH). The EMH is based on the assumption that capital markets react in an efficient and unbiased manner to publicly available information. The main strengths of Positive Accounting Theories over Normative Accounting Theories are the facts that hypothesis are framed in such a way that they are capable of falsification by empirical research. Also, these theories aim to provide an understanding of how the world works rather than stating how the world should work. Moreover, PAT tries to understand the relationship and connection between various accounting information, managers, firms, and markets; and also analyze these relationships within an economic framework. There are several assumptions made in development of positive accounting theory. The first is that the firm is a nexus of contracts. In relation to Positive Accounting Theory, because there is a need to be efficient, the firm will Continue reading
Exit Price Accounting â Definition and Criticisms
Exit Price Accounting (EPA) also known as Continuously Contemporary Accounting (CoCoA) has been proposed by researchers such as McNeal, Sterling, and especially Raymond Chambers. Itâs an accounting theory that prescribes that assets should be valued at exit prices and that financial statements should function to inform about an organizationâs capacity to adapt.  Chambers described the entityâs capacity to adapt as the cash that could be obtained if the entity sold its assets. Chambers believed that economic survival of the entity depends on the amount of cash it can command and the balance sheet is crucial to these decisions. Chambers used the term âcurrent cash equivalentsâ to refer to the amount that was expected to be generated through the orderly sale of assets. He believe that the information about current cash equivalent were fundamental to effective decision making. Chambers stated that âthe accounting rules used were so different in effect that Continue reading
Current Cost Accounting â Definition and Criticisms
Current Cost Accounting (CCA) attempts to provide more realistic book values by valuing assets at current market buying prices. It takes into account time-value of money and inflation. It is more complex than the traditional accounting, and it has created controversy about what adjustments are appropriate. Unlike Historical Cost Accounting, there is no need for inventory cost flow assumptions such as last-in-first-out and weighted average. The business profit in CCA shows how the entity has gained in financial terms the increase in cost of its resources, which is ignored by historical cost accounting. Differentiating operating profit from holding gains and losses has claimed to enhance the usefulness of information being provided by CCA. Holding gains are different from trading income as they are due to market-wide movements which are beyond the control of the management.  Therefore,  Current Cost Accounting doesnât rewards managers for profits from holding gains and losses which Continue reading