Question

1)Explain the difference between accrural basis net income and operating cash flows

2) Explain how the perpetual inventory system of accounting is a perfect illustration of the matching principle at work. Include in this explanation some discussion of how both the income statement and the balance sheet are affected by merchandise inventory.

3) how can a accounting background benefit you int he future?

Answer 1

1) Net income is the revenues recognized in a reporting period, less the expenses recognized in the same period. This amount is generally calculated using the accrual basis of accounting, under which expenses are recognized at the same time as the revenues to which they relate. This basis of accounting calls for the use of expense accruals to accelerate the recognition of expenses that have not yet been paid, as well as the use of prepaid expenses to defer the recognition of costs that have not yet been consumed. In addition, sales are recognized as they are earned, rather than when the associated amounts of cash payments from customers are received. The result is a net income figure that does not reflect the amount of cash actually consumed or generated in a period.

the key differences between net income and net cash flow are:

• Expense accruals. Expenses are included in the calculation of net income for which no cash payments may have yet been made.
• Prepaid expenses. Cash payments for costs incurred may be recorded as assets instead of expenses, since they have not yet been consumed.
• Deferred revenues. Revenues are excluded from the calculation of net income, because they have not yet been earned, even though the related cash may have already been received (perhaps as a customer deposit).
• Sales on credit. Revenues are included in the calculation of net income, because they have been earned, even though the related cash receipts may not yet have been received.

2)

In Perpetual inventory system, inventory assets are referred to as Merchandise Inventory is recorded as a current asset. As inventory bought, sold and returned by customers, a separate cost of goods sold account is updated in real time. Merchandise inventory is updated with sales and returns also.

This matches the COGS of the inventory itself with the performance of the sale or return, hence putting both in the same period for the income statement. The matching principle stating that revenues and expenses should be recognized in the same period they were related to each there.

There are several ways to decide how to develop the cost of the inventory: Last in-first out, First-in first out, Specific Identification of each item, or a weighted average. These may not follow the flow of good and are used for both tax and accounting purposes.

There is a problem with matching though, when the inventory loses value as an asset. A company should be watching this and keep good records to abate a potential matching problem. A lower of cost or market calculation is used to decide if inventory should be written down during a period.

3)First, accountants understand taxes and once you understand taxes and know the loop holes in taxation laws you will understand how to use the laws to maximize profits and to make sure the business or you doesn't get into trouble with the IRS or whatever tax agency that your country has.

Secondly, you will manage your money better as you will know how to keep track of cash flow, what goes in and what goes out.

Third, you can manage your own money because of the financial and accounting skills you have, instead of gettin people to manage your money who may cheat you out of your own money or fail to pay your taxes on your behalf. There are some crooked accountants out there that would cook the books and rob you without you even knowing so having an accounting background helps alot.