Cash basis accounting is "all about" CF and little else. Note, incidentally, that for the few firms that use cash basis accounting(instead of accrual accounting), the distinction between cash flow on the one hand and accounting terms (income, revenue, expense, and cost) on the other hand, largely disappears. "noncash" expenses do not appear on the cash flow statement. Cash Flow Reportingįirms report actual CF gains and losses for the period directly on another reporting instrument, the Statement of changes in financial position ( SCFP, or Cash flow statement, or Funds flow statement). These are charges against earnings solely to lower reported income (thereby lowering taxes). The best known noncash expense is depreciation expense, while others include amortization and writing off bad debts. Tax authorities also allow businesses to report some noncash expenses on the Income statement. Cash flow needs also include the costs of developing new products and upgrading the infrastructure. These include, for instance, paying employee salaries and wages, and paying interest on loans or bonds. The timing and management of cash flow are critical for meeting obligations and needs.The timing and management of revenues, costs, and expenses are critical for reporting earnings, determining taxes, and declaring dividends.The resulting cash inflows and outflows may or may not occur in the same period. The majority of businesses worldwide use accrual accounting, by which they report revenues in the period they earn them, along with the expenses they incur in earning the same revenues. Individuals and companies in business must manage revenues, and expenses, on the one hand, and cash inflows and outflows on the other. Cash flow from the sale comes later when the customer sends payment. A company may sell goods or services, send the customer an invoice requesting payment, and recognize revenue earnings with a transaction in its accounts as an Account Receivable.The firm removes the liability later with a different event when cash flows from buyer to seller. A company may purchase goods or services on credit and register a charge (liability) in its accounts as an account payable.Cash flow occurs later when the cardholder pays the credit card bill. As a result, dinner is an expense event, but not cash flow for the diner. Consider a person paying a restaurant bill with a credit card (a charge card, not a bank debit card).Revenues and Expensesīusiness people distinguish cash flow from accounting terms such as income, revenue, expense, and cost, all of which may result in CF, but which are not that themselves. The ability of a business to meet near-term obligations is described with Liquidity metrics such as Current Ratio and Working capital. Water and properties of liquids serve as metaphors for describing moving cash.
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