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why dont we calculate the difference in the equity account between the beginning and end of...

why dont we calculate the difference in the equity account between the beginning and end of the year and consider that difference as a source or use of cash? why do we similarly exclude the cash account?

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Expert Solution

Why don't we calculate the difference in the equity account between the beginning and end of the year and consider that difference as a source or use of cash?

The changes in equity balances during the year would be due to:

1) Net income or loss for the year, all of which is not realized or lost in cash

2) Other non-cash items like

*Dividends declared but not paid

*Conversion of debt to equity

*Issue of shares for consideration other than cash

*Unrealized holding gain or loss on investments forming part of other comprehensive income, etc.

As all the net income is not realized in cash and there would have been other transactions (like those listed above) affecting equity but not involving cash, it is not correct to treat difference in beginning and ending balances of equity as source/use of cash.

Why do we similarly exclude the cash account?

Change in cash during the period is the result of many cash transactions that have happened. This change reflects one aspect of the double entry. The other aspect are the changes in other accounts (other than cash), which are reflected in the statement of cash flows.

Of course at the end, the change in cash during the year is added to the beginning cash to get the ending cash.

jeff jeffy answered 1 year ago
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