CHAPTER 5-d

CHAPTER 5-d - resulting from the transaction would be an...

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CHAPTER 5 5-18 Sales revenue is recognized on the accrual basis when it is earned and realized, not when cash is received. Therefore, cash collections from customers will not ordinarily equal sales revenue during any given period. Sometimes cash from customers arrives before it is earned (creating a liability to perform) or after it is earned (collection eliminates an account receivable). 5-19 Changes in the inventory and accounts payable accounts explain the difference between cost of goods sold and cash payments to suppliers. 5-20 Strictly speaking, net losses, by themselves, do not drain cash. A net loss is an excess of expenses over revenues; it is an income statement item rather than an item on a statement of cash flows. As an extreme example, equipment may be sold below its book value and cause a net loss, but cash proceeds
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Unformatted text preview: resulting from the transaction would be an addition to cash, not a cash drain. 5-21 Cash + Noncash assets = Liabilities + Paid-in capital + Retained earnings Cash = Liabilities + Paid-in capital + Retained earnings Noncash assets 5-22 The erroneous impression is that depreciation is a source of cash because it is added to net income to determine cash flow from operations. Depreciation is an allocation of an assets original cost to expense that does not entail a current cash outlay; that is, depreciation is a noncash expense. It is added to net income when using the indirect method only to offset its deduction in computing net income. 5-23 The newsletter reinforces the widely held erroneous impression that depreciation provides cash. See the solution to 5-22....
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CHAPTER 5-d - resulting from the transaction would be an...

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