Question

The accrual accounting system is a standard system used by most businesses and is also the system used in the simulation. In relation to the rules of accrual accounting, consider the following questions:

How does the accrual accounting system impact the financial statements and the standing positions of firms in the simulation such that these may not reflect the true, long-term sustainability of the firms' strategies?

What is being "unaccounted" for?

What contrasts are there between what is shown in cash flow statements and the need for firms to borrow at high rates and firms' income statements?

Answer 1

Accrual basis of accounting attempts to match the revenue a company has earned in the period with expense that were incurred to generate the revenue . Under cash base accounting , revenue and expenses has been accounted as per cash basis . With help of accrual base of accounting , company can disclose proper Income statement .Revenue and expenses that relates to specific job or sales are matched in the same period

Accrued expenses – mean expenses has been incurred but not yet paid . Company has to account ( rather pass entry ) for accrued expenses debit an Expense account , increasing expenses on the Income statement and reducing net Income and credit a payable account ( increasing liability ) in the balance sheet

Under accrual basis of accounts , revenue are reported on the Income statement when they earned . When the revenue earned but cash not received , the asset account receivable will be recorded

Under accrual basis of accounting , main focus will be what revenue were earned and what expenses were incurred .The accrual basis of accounting provides a more accurate measure of a company profitability during an account period and a more accurate picture a company assets and liabilities at the end of an accounting period

Accruals are amounts that are unaccounted for either because they are revenue earned or expense incurred that have not yet been recorded in accounts . Recording accruals enables an Organization to keep records of revenue and expenses that have not been received or incurred

Firms need to borrow fund at high Interest rate will definitely create a negative Impact on Income Statement ( PNL) . More borrow will show Increase value in cash flow “cash flow from Financial Activity “