b. Installment Notes Payable – This represents an indebtedness that is repaid through installment over a period exceeding one year. The portion of principal scheduled to be paid in the next 12 months or within one year is classified as current liability. III. Equity Sections: The excess of assets over the liabilities of the business represents the ‘equity’ of the owners. The two principal element of comprising owner’s equity are the proprietor’s investment and the earnings of the business. Statement of Cash Flows Cash versus Accrual Basis of Accounting The cash basis accounting recognize revenue when cash is received; and recognizes expenses when cash is paid. For example, under the cash basis,
services rendered in 2017 for which cash is collected in 2018 would be treated as 2018 revenues. Similarly, under the cash basis, expenses incurred in 2017 for which cash is disbursed in 2018 are a 2018 expense. Because of these improper assignments of revenues and expenses, the cash basis of accounting is generally considered unacceptable. There is no need for adjusting entries under the cash basis of accounting. The accrual basis of accounting recognizes revenues when sales are made or services are performed, regardless of when cash is received. It also recognizes expenses as incurred, whether or not cash is paid out. For instance, when services are performed for a customer on account, the revenue is recorded at that time even though cash has not been received. Late, when they receive cash no revenue is recorded because it has already been recorded. Under the accrual basis, adjusting entries are used to bring the accounts up-to- date for economic activity that has taken place but has not yet been recorded. Statement of Cash Flow The Statement of Cash Flows is a financial statement that provides information about the causes of a change in company’s cash balance from the beginning to the end of specific period. In addition to providing information about a company’s receipts and cash payments during a specific period, the Statement of Cash Flows helps investors, creditors, and other external parties to: a. Assess a company’s ability to generate future net cash flows. b. Assess a company’s need for external financing and its ability to pay its debts. c. Reconcile the difference between net income and change in cash. The Statement of Cash Flows discloses exactly what caused the cash balance to change from the beginning of the period to the end of the period. This statement is organized around the three major types of business activities, namely: 1. Operating 2. Investing 3. Financing The total effect of these three categories of activities results in either a net increase or decrease in cash. Cash Inflows (Outflows) from Operating Activities Operating activities result in cash inflows and outflows generated from the normal course or day to day business transactions of the company.
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