Linking Accural Accounting and the indirect cash flow statement

Linking Accural Accounting and the indirect cash flow statement

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Linking Accural Accounting and the indirect cash flow statement We know from last week that there are 6 possible options (See Class 3 notes ): 1. Defer Revenue – customer pays in advance of company performing services or providing good. 2. Simultaneous cash receipt and revenue recognition 3. Accrue Revenue – customer pays after we have provided the good or service 4. Defer Expense – we pay in advance of receiving the benefit 5. Simultaneous cash payment and expense recognition 6. Accrue expense – we receive some benefit which helps us generate revenue in the current period – which we will pay for later There are two periods required for cases 1, 3, 4, and 6. i.e. the cash comes in or goes out in different periods in which we are going to recognize the revenue or expense – accruals and deferrals are reversed in subsequent period(s). Case 1 – cash comes in before accounting revenue recognition, Case 3 – cash follows (comes in after) accounting revenue recognition, Case 4 – cash outflow precedes expense recognition, Case 6 – cash outflow follows (goes out after) expense recognition . Notice that accounting and cash recognition occurs in different periods but that the total or cumulative effect is the same!! Over the entire life of the operation – when all assets and liabilities are extinguished total cumulative net income and total cumulative cash flows will be equivalent. Here for the multi-period cases – income or expense accounting occurs in one period, cash occurs in the other. Cash Accrual Accounting Cumulative Period 1 Period 2 Period 1 Period 2 Period 1 + 2 Case 1 inflow $0 Deferral Deferral reverses Equal Case 2 inflow n/a recognition n/a Equal Case 3 $0 inflow recognition Accrual Reversal Equal Case 4 Outflow $0 Deferral Recognition & deferral reverses Equal Case 5 Outflow n/a recognition n/a Equal Case 6 $0 Outflow recognition Accrual Reversal Equal It is these timing differences (Accrual Accounting vs. cash flows) that give rise to the reconciling items
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This note was uploaded on 10/17/2011 for the course MGMT 600 taught by Professor Johnston during the Spring '11 term at Purdue University-West Lafayette.

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Linking Accural Accounting and the indirect cash flow statement

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