February 2009 Archive

Generally, the book values of the liabilities of a business are the amounts of cash owed to creditors and lenders that will be paid later. The book value of the asset accounts receivable is the amount of cash that should be received from customers, usually within a month or so. The book value of inventories (products held for sale) and property, plant, and equipment are the costs of the assets. The cost of inventories is relatively recent under one method of accounting or, alternatively, relatively old under another. (Accountants cant agree on just one method for this particular asset.) (more…)

The usual explanation of the balance sheet is that it is the f nancial statement that summarizes a businesss assets and liabilities. Well, yes and no. If you have in mind a complete reckoning of all the assets of the business at their current market or replacement values you are off the mark. The balance sheet does not list all assets at current values. On the other hand, the balance sheet comes close to listing all the liabilities
of a business. You may find these opening comments about the balance sheet rather unusual, and I dont blame you if you think so. (more…)

Net profit for the year is $2.2 million, equal to $26 million sales revenue less $23.8 million expenses. In
contrast, the net cash flow of revenue and expenses is $3.3 million for the year. Both figures are correct. The $2.2 million figure is the correct measure of profit for the year according to proper accounting methods for recording sales revenue and expenses to the year. The $3.3 million net cash flow figure is correct, but keep in mind that cash flows related to revenue and expenses of the previous year and the following year are intermingled with the cash flows of revenue and expenses of the year just ended. (more…)

Many expenses recorded in the year were paid in cash during the yearneither before the year started nor after the year ended. In Figure 2.1, note that the company recorded $14.9 million total expenses during the year for which it paid out $14.9 million cash during the year. Many expenses are paid weeks after the expense is originally recorded; the business first records a liability on its books for the expense, and the (more…)

Before introducing the financial statements for the business example, I present Figure 2.1, in which cash flows are separated from the accrual-basis components for sales and expenses. (I culled this information from the accounts of the business.) Figure 2.1 is not a financial statement. Rather, present this information to lay the groundwork for the businesss financial statements. This figure presents the basic building blocks for sales revenue and expenses and for cash flows during the year. This information also is very helpful to understand the balance sheet, which is explained later in the chapter. (more…)