Purpose Of This Week's Assignment Illustrates The Role

Purpose Of Assignmentthis Weeks Activity Illustrates The Role A Compa

This week’s activity illustrates the role a company’s accounting method plays in financial statement reporting. In this assignment, students evaluate the events that occur in a business setting and determine how to properly analyze those events to identify the impact on both cash and accrual accounting methods.

Resources required include generally accepted accounting principles (GAAP), the U.S. Securities and Exchange Commission (SEC), and tutorial help on Excel® and Word functions available on the Microsoft® Office website and additional online tutorials.

Students are expected to explain how cash and accrual accounting differ for each of the events listed in the scenario and describe the proper accrual accounting treatment. They should assess how, at the end of the year, BizCon reported a favorable net income, yet management remains concerned because the company is very short of cash. The memo must explain how BizCon could have positive net income and still run out of cash.

The paper should be a maximum of 700 words in length. It must include tables, graphs, headings, a title page, and a reference page consistent with APA formatting guidelines. In-text citations and references for intellectual property should be included. The paper should demonstrate logical flow through transitions, and sentences should be clear, complete, and concise, adhering to rules of grammar, spelling, and punctuation. The assignment is worth a total of 120 points, with specific criteria for content and writing quality.

Paper For Above instruction

Introduction

Understanding the distinction between cash and accrual accounting is fundamental in financial reporting. These two methods differ significantly in how they record revenue and expenses, which directly impacts a company's reported financial health and cash flow. This paper evaluates various business events in the context of BizCon, illustrating their treatment under both accounting methods. Additionally, it explains how a company can report a positive net income while experiencing cash shortages, illuminating common misconceptions in financial analysis.

Differences Between Cash and Accrual Accounting

Cash accounting recognizes transactions only when cash is received or paid, providing a clear picture of cash flow. In contrast, accrual accounting records revenues when earned and expenses when incurred, regardless of cash movement. For example, if BizCon delivers services in December but receives payment in January, cash accounting recognizes the revenue in January, while accrual accounts for it in December. The key difference lies in timing: cash basis focuses on actual cash movements, whereas accrual basis emphasizes economic activity.

Analyzing Business Events

Let us consider specific events at BizCon. Suppose BizCon completes a project in December and bills the client, but the client pays in January. Under accrual accounting, revenue is recognized in December, aligning with the delivery of service. Under cash accounting, revenue is recorded in January when payment is received. Similarly, expenses, such as salaries payable at year-end, are recognized in December under accrual, even if payment occurs later.

Impact on Financial Statements

These differences significantly affect financial statements. Under accrual accounting, BizCon’s revenue and expenses in December reflect the company's economic activity, potentially leading to a favorable net income. Cash flow statements, however, only reflect actual cash movements. Consequently, BizCon can report high net income on the income statement but face cash shortages if cash receipts are delayed or expenses are paid before revenue recognition.

BizCon’s Year-End Scenario

In BizCon’s case, despite reporting a favorable net income, management is concerned about cash flow. This discrepancy occurs because accrual accounting records revenues and expenses when they occur, not when cash is exchanged. For instance, large receivables at year-end might inflate net income but do not provide immediate cash. Similarly, large payables delay cash outflows, further widening the gap between income and cash position.

Implications and Recommendations

This scenario highlights the importance of analyzing both income statements and cash flow statements. To improve cash management, BizCon should monitor collection procedures and manage payables effectively. Management should also consider cash flow forecasts alongside accrual-based net income to ensure liquidity. Educating stakeholders about these differences is vital for informed decision-making.

Conclusion

In summary, the distinction between cash and accrual accounting profoundly impacts how financial health is perceived. While accrual accounting provides a comprehensive view of economic activity, it may not reflect actual cash availability. Recognizing this difference is crucial for accurate financial analysis and effective cash management strategies. For BizCon, balancing accrual results with cash flow management will be essential to sustain operations and achieve long-term success.

References

  • Arnold, G., & Visitat, A. (2018). Financial accounting (13th ed.). McGraw-Hill Education.
  • FASB. (2020). Accounting Standards Codification (ASC) 606: Revenue from Contracts with Customers. Financial Accounting Standards Board.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting (16th ed.). McGraw-Hill Education.
  • Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2019). Introduction to financial accounting (11th ed.). Pearson Education.
  • Kim, K., & Kim, S. (2021). Cash flow management in small and medium-sized enterprises. Journal of Business Finance & Accounting, 48(5-6), 789-812.
  • SEC. (2023). Financial Reporting Manual. U.S. Securities and Exchange Commission.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting: IFRS edition (3rd ed.). Wiley.
  • AccountingTools. (2022). Cash vs. Accrual Accounting. https://www.accountingtools.com/articles/2017/5/5/cash-vs-accrual-accounting
  • Revsine, L., Collins, D., & Johnson, W. (2019). Financial reporting & analysis. Pearson Education.
  • Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.). McGraw-Hill Education.

Related Assignments