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Unformatted text preview: sis on Cash Flows
In preparation of financial
statements, recognizes revenue
at the time of sale and recognizes
expenses when they are
Recognizes revenues and
expenses only with respect to
actual inflows and outflows of
cash. The accountant’s primary function is to develop and report data for measuring
the performance of the firm, assessing its financial position, and paying taxes.
Using certain standardized and generally accepted principles, the accountant prepares financial statements that recognize revenue at the time of sale (whether payment has been received or not) and recognize expenses when they are incurred.
This approach is referred to as the accrual basis.
The financial manager, on the other hand, places primary emphasis on cash
flows, the intake and outgo of cash. He or she maintains the firm’s solvency by planning the cash flows necessary to satisfy its obligations and to acquire assets needed
to achieve the firm’s goals. The financial manager uses this cash basis to recognize
the revenues and expenses only with respect to actual inflows and outflows of cash. 12 PART 1 Introduction to Managerial Finance Regardless of its profit or loss, a firm must have a sufficient flow of cash to meet its
obligations as they come due.
EXAMPLE Nassau Corporation, a small yacht dealer, sold one yacht for $100,000 in the calendar year just ended. The yacht was purchased during the year at a total cost of
$80,000. Although the firm paid in full for the yacht during the year, at year-end
it has yet to collect the $100,000 from the customer. The accounting view and the
financial view of the firm’s performance during the year are given by the following income and cash flow statements, respectively.
(accrual basis) Financial View
(cash basis) Nassau Corporation
for the Year Ended 12/31 Nassau Corporation
Cash Flow Statement
for the Year Ended 12/31 Sales revenue
Net profit $100,000
$ 20,000 Cash inflow
Less: Cash outfl...
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- Fall '13