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solve02 - FNCE 3010(Durham HW 2(Financial statements 1 Why...

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FNCE 3010 (Durham). HW 2 (Financial statements) 1. Why is it that the revenue and cost figures shown on a standard income state- ment may not be representative of the actual cash inflows and outflows that occurred during a period? Solution: The recognition and matching principles in financial accounting call for rev- enues, and the costs associated with producing those revenues, to be ”booked” when the revenue process is essentially complete, not necessarily when the cash is collected or bills are paid. Note that this way is not necessarily correct; it’s the way accountants have chosen to do it. 2. In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in operating cash flow. Solution: Depreciation is a non-cash deduction that reflects adjustments made in asset book values in accordance with the matching principle in financial accounting.
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