Matching problems refer to cash inflows and cash

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Unformatted text preview: re recorded at a lag. Accruals - Cornerstone of Accounting • Information about enterprise earnings based on accrual accounting generally provides a better indication of enterprises present and continuing ability to generate flows than information limited to the financial aspects of cash receipts and payments. Accrual accounting - an illustration • Accrual adjustments - adjust cash inflows and outflows to yield revenues and expenses. Accruals and Cash flows • Operating cash flow - refers to cash from a companys ongoing operating activities • Free cash flow - reflects the added effects of investments and divestments in operating assets • Free cash flow to equity - adds changes in the firms debt levels to free cash flow to the firm and yields the cash flows that are available for equity holders. • Net cash flow - the change in cash account balance • Accruals - the sum of accounting adjustments that make net income different from net cash flow • Net income = operating cash flow + accruals o Short term - related to working capital items o Long term - such as depreciation and amortization • Timing - problems refer to cash flows that do not occur contemporaneously with the business activities yielding the cash flows. • Matching - problems refer to cash inflows and cash outflows that occur from a business a...
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