Question

Navigate to the Discussion page and answer one side of one of the selected debates.

Debate 7-1: Usefulness of the Statement of Cash Flows versus the Income Statement

Debate 8-3: Capitalization versus Expense

Answer 1

Debate 7-1:

The income statement and the cash flow statement are two critical financial statements. The cash flow statement, also referred to as statement of cash flows contains the sources and uses of cash and cash equivalents of a company within a specified time(Schroeder, Clark & Cathey, 2013). On the other hand, the income statement contains the revenues, gross margins, and profits/losses of a company. Unlike the income statement, the cash flow statement enumerates the exact amount of an entity’s cash inflows and cash outflows. It also captures changes in the balance sheet and current operating outcomes. Additionally, unlike the income statement which includes non-cash items such as depreciation, cash flow statement only includes cash accounting items only(Porter& Norton, 2016). By showing inflow and outflow of cash and cash equivalents, cash flow statement determines the liquidity and short-term viability of an entity and hence, vital to investors.

 

Debate 8-3:

In line with the historical cost principle, an asset’s historical cost is basically all the costs incurred to acquire the asset and prepare it for its intended use(Schroeder, Clark & Cathey, 2013). Some of the costs include actual purchase price, the cost incurred to remove the building, the cost to refine soil, and the cost to remove tanks. These costs must be capitalized to show the actual value of the building in the statement of financial position (balance sheet). They should not be expensed in the income statement.