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Financial Reporting - Research Paper Example

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Financial Reporting

e we need to distinguish between cash and profits, and to determine the usefulness of information provided in balance sheet and income statements in the problem of deciding whether a company, has or will be able to generate sufficient cash to finance its operations.
Cash flow in a company leads to the following items;

Cash from cash in cash out cash goes:
Profits Losses
Sale of fixed assets Purchase of fixed assets
Decrease in stock increase in stock
Decrease in debtors increase in debtors
Capital introduced drawings
Received loan Paid loans
Increase in creditors Decrease in creditors
Dividend received Dividend paid
Interest received Interest paid


In our case, profit from operations before interest and tax of 1654 has overstated profits. We need to deduct interest and tax to get the real value of profit after tax and interest. An increase in inventories reduces cash balance as well as increase in trade receivables. Depreciation is an expense charged on the asset. It does not affect cash balance in the firm. An increase in trade payables increases cash inflow. This gives a balance from operations of 1377. Interest paid and income tax paid reduces cash balance too. At the end of the day, net cash from operating activities is overstated by depreciation and profit before tax and interest. A company's performance are realistical and do not depend so much on profits earned in the period but on liquidity of cashflows
International Accounting Standards 7 "provides information to users of financial statements about cashflows of a company. It provides information on ability of the company to generate cash and cash equivalents. It also indicated cash needs for the enterprise. The standards provides that cash...
Depreciation is an expense charged on the asset. It does not affect cash balance in the firm. An increase in trade payables increases cash inflow. This gives a balance from operations of 1377. Interest paid and income tax paid reduces cash balance too. At the end of the day, net cash from operating activities is overstated by depreciation and profit before tax and interest. A company's performance are realistical and do not depend so much on profits earned in the period but on liquidity of cashflows
International Accounting Standards 7 "provides information to users of financial statements about cashflows of a company. It provides information on ability of the company to generate cash and cash equivalents. It also indicated cash needs for the enterprise. The standards provides that cash needs for the activities, investing activities and financing activities"
These are accounts of two companies that are combined into one account. This happens when one firm acquires one or more other companies. This is mainly for a business combination a company acquires control of one or more enterprises. They combine into one entity as a whole therefore profit and loss accounts are combined into one.
This is where o ...Show more

Summary

Definition: In the longrun, profits result in increase of Company's cash balance but this doesn't help to pay out short term obligations. In the shortrun, making profit will not necessarily result in an increase in c ahs balance. Therefore we need to distinguish between cash and profits, and to determine the usefulness of information provided in balance sheet and income statements in the problem of deciding whether a company, has or will be able to generate sufficient cash to finance its operations.
Author : tillmanseth
Financial Reporting Research Paper essay example
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