Question

Discuss the differences between the accrual basis and the cash basis of accounting ( we did mention it in previous discussion forum)

What's the differences between cash flows and cash forecast?

You might want to interview a banker or small business owner, asking them how they use the particular statement in decision making

Answer 1

Q1: Discuss the differences between the accrual basis and the cash basis of accounting?

Solution: The Accural basis of accounting states that the income will be recorded when it is earned and may be received later on as well as the expenses are recorded when they are incurred and may be paid later on.

Example: The Commision earned worth $1000 is recorded in the books may be it is received after one week and salary expenses are recorded when they are due may be paid later on.

Cash basis of accounting states that income should be recorded when it is actually received and expenses are recorded when they are actually paid.

Example: If the Commision is earned worth $1000. It is not recorded unless it is not received on actual basis.

Q2: What are the differences between cash flows and cash forecast?

Solution: The cash flows refer to the cash inflows and cash outflows from business operating, investing and financing activities.

Example: The cash inflows expected in the current quarter is $5000 and cash outflows are expected are worth $3000. Therefore, the net cash flows will be $2000 ( $5000-$3000).

Cash forecast means well-educated guess or prediction about the future cash inflows and outflows from operating, investing and financing activities.

Example: On the basis of Three quarter cash flows of the company, the company is estimating that cash inflows will increase by 10% and cash outflows will increase by 7%

Q3: You might want to interview a banker or small business owner, asking them how they use the particular statement in decision making.

Solution: Yes, I can ask a lot of questions:-

Q1: Which ratios you use to study before taking debt in the market/

Q2: What is the role of existing reserves of the company while making dividend decisions?

Q3: How you manage short-term financial obligations in the case of inflation?

Note: The above questions will help to sort out the relevance of financial statements in taking a various short term and long term decisions.