Cash basis recognizes revenues and expenses only with

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Unformatted text preview: sis on Cash Flows accrual basis In preparation of financial statements, recognizes revenue at the time of sale and recognizes expenses when they are incurred. cash basis 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. Accounting View (accrual basis) Financial View (cash basis) Nassau Corporation Income Statement for the Year Ended 12/31 Nassau Corporation Cash Flow Statement for the Year Ended 12/31 Sales revenue Less: Costs Net profit $100,000 80,000 $ 20,000 Cash inflow Less: Cash outfl...
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