Problem_2

Problem_2 - In accrual accounting, cash flows do differ...

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Problem 2.7 Performance assessment from financial statements THE MARKETING STORE A. THE MARKETING STORE Income Statement for the year ended 31 December 2007 INCOME Marketing services $280 000 EXPENSES Supplies and labour expense $200 000 Rent expense 33 000 PROFIT $47 000 B. THE MARKETING SHOP Cash Flow Statement for the year ended 31 December 2007 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $280 000 Cash paid to suppliers and employees (233 000) Net cash from operating activities $47 000 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of vehicle (32 000) Purchase of design system (50 000) Purchase of land (80 000) Net cash used in investing activities (162 000) CASH FLOWS FROM FINANCING ACTIVITIES Bank loan 30 000 Drawings by owner - Net cash from financing activities 30 000 Net increase (decrease) in cash held (85 000) Cash at beginning of year 100 000 Cash at end of year $15 000 C. Yes.
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Unformatted text preview: In accrual accounting, cash flows do differ from income and expenses. For example, cash flows from investing and financing activities will affect cash outflows but are not income and expenses counted in calculating profit. Most cash flows from operating activities also result in income or expenses, but in different time periods. Many cash flows from investing and financing activities never result in income or expenses e.g. cash increases from borrowings. In terms of profitability, profit is more important in the long run if profits are not made, the business will fail. However, liquidity can also cause major problems and cash flow is also important. A business can have positive cash flows while trading at a loss in the short term, but in the long term, profits and positive cash flows are both important....
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