Re_WEEK_ONE_-_DISCUSSION_QUESTION__2posted_byDONALD_DENNISAug

posted by Linda Moore

Aug 19, 2014, 6:52 PM

Good! The income statement tells us what we've earned, our sales and expenses, and in the balance sheet we see our assets and liabilities, and owner's equity. The equity will also increase if we have net income and other investments from our owners. Our income statement tells us a lot especially when we compare months over time - we can see trends of expenses and revenues; and analyze what has changed.

Class: Any questions?

· Comment on Aug 20, 2014, 9:13 AM

2 Other Statements

posted by DONALD DENNIS

Aug 20, 2014, 9:13 AM

Other than the income and balance sheets, there are two other documents that are just as important. More about these will be mentioned in this week and class.

Owners equity statement - This shows and explains changes in the retained earnings. Retained earnings are on the balance sheet and will change due to incomes or dividends.

Cash flow statement - A company could be successful, yet lack cash to pay its bills. This will show sources of cash and where cash is being used.

· Comment on Aug 20, 2014, 11:36 AM

posted by Mark Pollack

Aug 20, 2014, 11:36 AM

Donald,

You bring up a great point about the cash flow statement. I was a small business owner in a retail strip center. I cant tell you how many conversations I had with fellow business owners that were struggling to pay there bills; however they showed a profit. The company used the money in various ways other than appropriately such as product that did not sell, decorations, "write-offs" for their home. I do believe that many small businesses fail because they are underfunded and do not use simple accounting principles to determine its health.

Mark

· Comment on Aug 21, 2014, 10:09 AM

posted by DONALD DENNIS

Aug 21, 2014, 10:09 AM

I currently work for a small business. 2 owners, and 2 employees. The owners live off the business account, so nothing is separate. Years ago it wasn't like that, but times got tough and the additional money flows dried up. When your business check account is directly tied to your personal spending and bills, some things will suffer.

· Comment on Aug 23, 2014, 10:04 PM

posted by Linda Moore

Aug 23, 2014, 10:04 PM

Donald - that's true; when times get tough, this is the tendency. However, you are technically "stealing" from your business and this just drains the business of its cash. Eventually, the business suffers because it cannot replenish inventory, make repairs, add to fixed assets, etc. It is always advisable to keep business and personal assets separate.

· Comment on Aug 24, 2014, 4:20 PM

posted by Mark Pollack

Aug 24, 2014, 4:20 PM

Hi Linda and Donald,

We had a good friend who lost his business by using funds. Times were not tough, actually money was quickly flowing in to the organization. However, the company bought his cars, his boat, his "business" trips and as you can see...when the business needed capital it wasn't available. I am unsure how you can "legally" account for these things; however, I am aware of companies doing it.

· Comment on Aug 22, 2014, 11:08 PM

posted by Linda Moore

Aug 22, 2014, 11:08 PM

Mark - that is so true! When I first moved to Florida, the area was near Daytona. There were several small businesses opening up, but the new business owners were not careful; they had cash and would think they were doing fine, and would take the cash out and use it for personal things as you mentioned. The one thing that people do wrong is to forget to reinvest the cash back into the business. Also, Sales or profits on paper does not necessarily mean you have cash! Extending credit to the wrong people is also a common mistake, and your example of purchasing too much product that does not sell. You don't want to find yourself with a warehouse full of outdated products!

· Comment on Aug 23, 2014, 8:33 AM

posted by DONALD DENNIS

Aug 23, 2014, 8:33 AM

I can see how this could be a problem when working with individuals and business in regards to an "on account" basis. I see this a lot in the service industry I work in and have worked in with numerous companies. However with the company I work for now, more times than not we only allow this to happen with long time clients or friends. However, because we are a struggling business, the owners may overlook some of the basics of doing business to draw in business and make us a convenience to our customers, our company tends to have too much money floating out there.

· Comment on Aug 23, 2014, 12:59 PM

posted by SARA HOMSI

Aug 23, 2014, 12:59 PM

Hi Donald, You bring up a valid point. However, the text talked about creditors using these types of financial statements in order to determine the likeliness that an organization could pay back it's debts and also to examine the past performance of the organization. This is no new theory to me/us as we can apply it to our personal lives. Before a bank is going to lend you money for a new car or mortgage, they are going to run a credit check on you, look at your income, etc. A history of late payments or something like bankruptcy may make it harder for one to get the loan. Or, it may result in having to pay a higher interest rate. At the end of the day, looking at a person or organization's past financial situation will help lenders make a better decision.

Sara

· Comment on Aug 23, 2014, 10:18 PM

posted by Linda Moore

Aug 23, 2014, 10:18 PM

Donald - this can become a problem, but at the same time, you want to attract customers. We especially want to offer more easy terms, in order for clients/customers to prefer to do business with us. This is fine, unless these same customers won't pay their bills! We can become in trouble if we find ourselves with a lot of uncollectible receivables. It is always a balancing act, to attract business, and to also be somewhat cautious when extending credit.

· Comment on Aug 22, 2014, 1:29 AM

posted by Linda Moore

Aug 22, 2014, 1:29 AM

Donald - yes, definitely! The Owner's Equity is important, because we want to see the accumulation of what net income we have retained over the life of our business. Also, we can see if the owners have added or taken out any withdrawals from the company as well.

The Cash Flow is very important, because we want to see what cash has been spent, and where the cash inflows have come from. This is vital for the survival of the business; Sales themselves don't necessarily mean cash, and of course, we can find out we are spending more than we make!

Good Post~!

· Comment on Aug 21, 2014, 6:20 AM

posted by ANDREW WAREING

Aug 21, 2014, 6:20 AM

From what I understand there is significant latitude in interpretation of the Generally Accepted Accounting Principles (GAAP) as defined by the FASB. Can this lead to intentional and unintentional misrepresentation of an organizations health on the financial statement?

Most executives will have their compensation directly tied to the financial performance of the company and the auditors are also compensated by the companies that they audit.

Perhaps I am too cynical but it would seem that despite the best efforts of the SEC, investors still need to be cautious in basing investment strategies on financial statements alone.

· Comment on Aug 21, 2014, 6:32 PM

posted by KEITH MAJORS

Aug 21, 2014, 6:32 PM

Andrew,

I agree with you in that investors should do more research on companies other than only viewing their financial statements before coming up with their plan to invest in the company. I would like to believe that many investors are well educated and have an understanding of the business world. I have learned in previous courses that businesses follow a business cycle and that cycle typically leads to a recession. The recession is followed by growth and the company will peak out again, and then start to have a bit of a recession.

This type of business cycle may better describe the economy as a whole, but my point is this. Investors can look at financial statements for many months or even years. They can look at balance sheets and all of the other financial statements to gain a better understanding of how the business operates and the investor will be able to pin point where the company is at in their business cycle. This will help them base their investment strategies on more than just the financial statements alone. There is more research involved.

At the end of the day, purchasing stocks in a company has a risk factor involved, the spectrum or risk is very large.

· Comment on Aug 22, 2014, 11:21 PM

posted by Linda Moore

Aug 22, 2014, 11:21 PM

Keith - that is so true; and we can research as much as possible but still have unknowns in regard to economic changes or other unknowns. Weather can change things, and for example, disasters such as the gulf oil leak creates issues no one could have foreseen.

Class: what other examples of unforeseen occurrences can you think of?

· Comment on Aug 23, 2014, 8:56 AM

Unforeseen occurrences

posted by DONALD DENNIS

Aug 23, 2014, 8:56 AM

In regards to the unforeseen occurrences that could happen at any time, you mentioned the oil spill, or spills that have happened a few times over the years.

As for a couple local geography based occurrences, my examples are as followed...

#1 I grew up in Illinois, so for one there are a lot of tornadoes and vicious winters.

#2 I am in Arizona now so flash flooding and fires are common. In addition to these, theft is a lot higher here than in Illinois (mainly vehicles)

· Comment on Aug 23, 2014, 1:09 PM

posted by SARA HOMSI

Aug 23, 2014, 1:09 PM

Last summer, the small beach town that I live in was hit with a hurricane that wiped out our beaches and many of the businesses that reside there. Many of the "ma and pa" shops that were down there couldn't recover from the hurricane.

In addition to natural disasters, an unforeseen occurance can include unemployment and recessions. Having just completed an economics class prior to this one, we talked heavily on the 4 phases of the business cycle and how things have to fluctuate quite a bit. One the business cycles, a recession, is a period of large unemployment and inflation. In these types of tough times, consumption is likely to decrease which often trickles down to a decrease in sales/revenues for businesses. This can be considered an unforeseen occurance as it makes it difficult for organizations to pay back debt.

· Comment on Aug 24, 2014, 6:16 PM

posted by JASON YORGENSEN

Aug 24, 2014, 6:16 PM

Class,

This year I noticed the effect that weather can have on a business. It can make a huge impact because it can deter customers from coming into the business. The other unexpected changes can happen when congress is involved. I know that after the bank bailout and mortgage issues regulations were changed that hindered how banks make money. This brought up the questions about how banks are not out for anyone but themselves and harmed the business. When laws are changed it can change the way people and businesses can make money.

Jason Yorgensen

· Comment on Aug 24, 2014, 7:28 PM

posted by KEITH MAJORS

Aug 24, 2014, 7:28 PM

In the area I live in there are multiple unforeseen circumstances. I live in the middle of Washington State where we have all weather conditions present throughout the seasons of the year. During the winter we may have such a harsh winter that businesses in town will not receive their shipments of supplies to be able to sell their customers. This impacts restaurants, bars, boutiques, and even the university. If we do not have enough snow in the winter and rain in the spring, the farmers will be affected. There will not be enough rainfall to fill the reservoir in the county that supply the irrigation for all of the farming.

· Comment on Aug 22, 2014, 1:37 AM

posted by Linda Moore

Aug 22, 2014, 1:37 AM

Andrew - very important comments indeed! I also wonder where the line is drawn, because we as a company pay our own auditors; and that always seemed a conflict in the first place. The main issue also is the way commissions and calculations are based. The sales people, and management, are very motivated to "overstate" earnings, because their compensation is based on these earnings levels.

Class: What is your opinion on this Post?

· Comment on Aug 22, 2014, 5:33 PM

posted by JASON YORGENSEN

Aug 22, 2014, 5:33 PM

Class,

I think that auditors should always be indepandant of the company. I believe there should be people in the company that routinely check things to make sure they are in compliance. This is a necessary evil of owning the company making sure everything and everyone is doing the correct thing. Although I think that every company should be routinely audited to ensure that there is an unbiased view of the business. This can show other businesses that they are doing things the right way because they are willing to have someone externally look at the company. It also adds credibility to the business when they use those numbers to help talk about the business.

Jason Yorgensen

· Comment on Aug 22, 2014, 11:23 PM

posted by Linda Moore

Aug 22, 2014, 11:23 PM

Jason - I agree! If the business is doing things right, then they should have no problem opening up to an unbiased outside auditor. Then, the users of the statements will have no problem in trusting them. Their confidence level will increase dramatically.

· Comment on Aug 24, 2014, 7:41 PM

posted by KEITH MAJORS

Aug 24, 2014, 7:41 PM

Jason,

I agree that it is a great tool to use external auditors! Having internal checks and balances is also another great tool that can be utilized to reduce the frequency of using external auditors. Some large companies hire auditors to come in an check their books for the reasons you've provided. Some companies may not be large enough to be able to afford to hire a third party company, so the checks and balances will help.

I know a few small business owners that perform their own accounting and they do not have the funds available to hire third party companies. So what they do is keep their books on their own and they have one person in charge of invoicing, another person in charge of paying wages, and another person in charge of receiving payments. This helps keep all of the accounting responsibilities off of one persons plate and helps ensure the company is not being taken advantage of or being stolen from.

· Comment on Aug 23, 2014, 9:04 AM

No cooking books!

posted by DONALD DENNIS

Aug 23, 2014, 9:04 AM

As an employee I would want to overstate earnings, but as a company wouldn't you want to understate your earnings, or just not lie! Can we not take example from many companies who lie...such as Enron!

To find the current health of the company (for purposes of investors, employees and so forth), overstating your earnings will make your business look better. Think about stock trade. The better the business is doing, the more likely the stock will be higher. When the stock rises, that is also additional sources of income made by us investors. If you understate your earnings, stocks will sell, lowering your company's total worth.

· Comment on Aug 24, 2014, 9:31 PM

posted by JEREMY ECKLIN

Aug 24, 2014, 9:31 PM

While I agree that the accounting principles and regulatory commissions overseeing the principles have loose requirements and the system of checks and balances has the potential for corruption, the financing system is based on the faithful representation of financial statements. I am as cynical as the next person about the loose financial statement principles, but if every company was an Enron, the system would have crashed long ago. The system is certainly not perfect, but with the implementation of the Sarbanes-Oxley Act of 2002, the good faith representation and relevant information assumption has to be trusted. Further, while there are incentives for corruption, if most companies were to unintentionally or intentionally misrepresent their data on a regular basis, there would be zero trust in the system and financing would cease. As a result, most information is probably relatively accurate because if enough companies do not act in good faith, the system crashes. Last, while there are incentives to misrepresent the data, for profitable companies, the potential ramifications of misrepresenting the financial health of the company is just not worth the risk if the company is profitable.

· Comment on Aug 23, 2014, 12:53 PM

posted by SARA HOMSI

Aug 23, 2014, 12:53 PM

When you say "we can see trends of expenses and revenues; and analyze what has changed," the first thought I had was what types of events or occurrences can affect a positive change in expense and revenues.? I realize that there are many things that can affect such numbers and financial statements but a few that I popped into my mind within my current organization includes mergers and acquisitions. My company grows largely by acquiring other companies. Since our latest acquisition, our numbers and financial performance has increased significantly. The acquisition allows the organization to reach an extended channel of sales, thus increasing sales revenues.

· Comment on Aug 23, 2014, 10:31 PM

posted by Linda Moore

Aug 23, 2014, 10:31 PM

Sara - that is a good example. In your business, we want to grow our channels of sales. In this way we can hugely increase our sales levels, and we can also take sales away from our competitors. We have to be careful not to spend so much on our investment as to get into trouble, however. Our expenses can also be reviewed, from month to month. We can see changes, and when there are increases, we can examine the details to understand the reasons why. Our efforts can be to reduce costs, or to increase sales, in order to raise our profit margin.

Class: What else can we do to add to profits?

· Comment on Aug 24, 2014, 5:56 PM

posted by SARA HOMSI

Aug 24, 2014, 5:56 PM

Other things that an organization can do to add to profits is to reduce cost. Less cost typically results in higher margins and better profits. Costs can be cut several ways. In my organization, we have several new product development projects at any given time, but we also have cost reduction projects going on at the same time. Sometimes changing manufacturing material(s), shipping from different warehouses, slight redesign of component parts, etc can really bring down cost of a product, but selling at the same price, you're going to make more on each product sold. You can also reduce operating expenses by hiring more efficient workers, automating certain process/practices, turning lights off when room(s) aren't in use.

· Comment on Aug 24, 2014, 7:49 PM

posted by KEITH MAJORS

Aug 24, 2014, 7:49 PM

Another way a company can increase profits is by increasing the productivity of its employees. Sometimes there is a cost associated with increasing the productivity of employees, but, generally that benefits of a more productive employee out weigh the costs.

Employees may become more productive through incentive programs and bonus structures. Employees become more productive through on the job training. It may cost money to train employees, but after they've become more productive, their inputs into the company will generate more profits.

Motivating employees by setting goals will help them be more productive and will increase profits. Employees who are striving to reach goals will work harder and will feel rewarded just by reaching the goal. Others who are not as easily motivated by reaching goals can be brought on board by using goals, incentives, and bonuses together.

· Comment on Aug 20, 2014, 3:41 PM

posted by JASON YORGENSEN

Aug 20, 2014, 3:41 PM

Class,

A balance sheet will show a number of things about the business. It shows what assets the business has as well as liabilities. It will also show a person what the shareholder equity is at any given day. The assets can include any business property that is owned, equipment, or cash in the bank. The liabilities will include any debts that the business has incurred either to suppliers or for loans.

The income statement will show how much money the company made. The statement can be used in a monthly, weekly, or yearly capacity. The statement will have what money was brought into the company and it subtracts the expenses that the company had for the time frame.

Each one of these tools can be used in different ways. They can be used if potentional investors want to purchase or invest in a business. These two sheets will give insight to how the company is preforming. If the numbers are consistently in the red the company may have a hard time finding investors. These can also be used by banks when the company wants to get a loan. The bank will look to see if the company can repay the loan based on what is coming into the business. Also it can determine the health of the business from the balance sheets.

Jason Yorgensen

· Comment on Aug 22, 2014, 1:52 AM

posted by Linda Moore

Aug 22, 2014, 1:52 AM

Jason - yes and we can look at these statements in comparison to the time period prior, or over the last year, to see trends. This is especially useful in the income statement, where we can compare certain expenses over time. We can review our payroll expense, or our insurance expense; to see if we have increases; then can research the reasons why. Also, we can look at sales revenue, and if this is growing larger, or we are losing momentum on our sales.

· Comment on Aug 23, 2014, 11:58 PM

Aug 23, 2014, 11:58 PM

· Comment on Aug 19, 2014, 8:08 PM

posted by Mark Pollack

Aug 19, 2014, 8:08 PM

Both are vital tools for businesses to see the financial health of the company. The income statement is used to detail company expenses and revenue from services or products. This provides a business leader, investor, owner or other stakeholder the ability to see profitability, revenue growth year over year, and analyze expenses over sales.

A balance sheet is a similar tool but is used to define assets, liabilities, and external incomes as compared to revenue. This information gives the stakeholders a clear picture of the net worth of the organization. I used balance sheet reports in my business to analyze my companies revenues and assets, depreciation, as compared to my gross income.

Both tools are used to help key leaders make business decisions such as: new employees, downsizing, creating/demolishing departments, and the like.

· Comment on Aug 22, 2014, 2:00 AM

posted by Linda Moore

Aug 22, 2014, 2:00 AM

Mark - The balance sheet is very useful as you've discussed. We can see our relationship between debts and assets, to know how healthy the business is, and an estimate of its longevity. We also want to see what assets we have and how much they have as accumulated depreciation. If they are all nearly depreciated, you can plan on the fact that we will have to replace some assets soon!

· Comment on Aug 24, 2014, 4:22 PM

posted by Mark Pollack

Aug 24, 2014, 4:22 PM

Thank you Linda for the reply. A few years ago we had a meeting with our accountant and we had depreciated a number of large items such as our X-Ray machine. It was funny to hear from her that we needed to go buy more equipment for the hospital we owned for the write offs and depreciation. That does put businesses in a tough spot potentially. The company was doing well, however, we were not in a position to spend more money or more percisely , that amount of money.

· Comment on Aug 19, 2014, 9:08 PM

posted by patricia surber

Aug 19, 2014, 9:08 PM

An income statement is a financial statement that helps businesses communicate with their users. The income statement reports revenues and expenses to locate the success or failure of a business in a certain time frame. The revenues and expenses are the company's operations. The income statement will date the ending of the time frame so the business knows the period of time of the results of the operations. The revenue is always recorded first on the income statement then the expenses next. The expenses are deducted from the revenues to determine the net income or net loss made in that certain period of time. The company wants to know the net income so they can predict future net income. Investors will look at the income statement to determine if they want to buy or sell their stock in that company. A balance sheet is another financial statement that helps businesses communicate with their users. Companies use a balance sheet to report assets and claims of assets such as creditors (liabilities) and owners (stockholders' equity) claims. On the balance sheet, the assets must match the claims of assets. The company uses the balance sheet to determine if they have the cash on hand to meet their cash needs.

· Comment on Aug 21, 2014, 6:12 PM

posted by JASON YORGENSEN

Aug 21, 2014, 6:12 PM

Class,

I agree with you that each are vital tools for leaders in a business. They are tools that will help leaders make key decisions. These tools are also important tools for investors and people outside of the company. Investors will use these tools to decide if the company is a good investment or something that is on the decline. Investors will also look at multiple businesses within the same industry to make an evaluation of the industry as a whole. These statements can show if its just one particular company struggling or if it is a complete change in the industry. It is important that businesses and leaders keep accurate records so everyone can understand how the business is operating.

Jason Yorgensen

· Comment on Aug 23, 2014, 7:49 AM

posted by patricia surber

Aug 23, 2014, 7:49 AM

I agree that these financial statements are vital tools. The balance sheet is also called the statement of financial position. The balance sheet lists what a company owns and what it owes to determine the company's financial standing. The income statement is also called the profit and loss statement which provides information about a company's profitability during a certain time frame. The purpose of these documents is to give decision makers the ability to look at the current situation of the company and make changes if needed. Creditors look at these documents to determine if they will loan this company money or not. Stock investors will look at these statements to determine if this company is a good investment or not.

· Comment on Aug 22, 2014, 2:26 AM

posted by Linda Moore

Aug 22, 2014, 2:26 AM

Patricia - we want to prepare our income statement to show the most important details of our business. For example, if we are a sales or telemarketing company, telephone expense may be more detailed than in another business; and advertising will also be a key expense item to be looked at. Outside investors or lenders will want to see the statements to make their judgment as to what to do. Our stockholders will want to decide also if they have a good investment, or want to sell their stock. Of course the IRS will be interested in our income information as well!

· Comment on Aug 23, 2014, 7:36 AM

posted by patricia surber

Aug 23, 2014, 7:36 AM

Great point. I work for a telemarketing firm. We are contracted by DirecTV to call their customers for them. We have many employees who work about 37.5 hours a week. Within that time they are making a lot of calls. We are open Sunday through Saturday. Saturday and Sunday we are open 7am to 3pm. Monday through Friday we are open until 10am to 6pm. The income statement would show the amount of calls that were made during a certain time frame. The income statement would have the amount of time for each call in seconds, minutes, and hours. I am very interested to see what the income statement would look like. I wonder what other detailed would be on the income statement.

· Comment on Aug 23, 2014, 10:38 PM

posted by Linda Moore

Aug 23, 2014, 10:38 PM

Patricia - what we see in our balance sheet is all of our assets, our liabilities and owner's equity. We can see where our assets have come from; owner's investing capital, or from accounts payable. Those looking at the data can then tell if the business is healthy or not. If too much is made up of debt, it is not good for the business.

· Comment on Aug 24, 2014, 5:43 PM

posted by patricia surber

Aug 24, 2014, 5:43 PM

Thank you. Assets are things that a business owns. The assets are resources of a business owns through transactions with economic value in the form of cash. The assets can be costs that have been paid advance such as advertising, insurance, legal fees, and rent. Asset accounts are reported on the balance sheet such as cash on hand, investments, accounts receivable, inventory, supplies, land, buildings, equipment, goodwill, and bond issue costs. The liabilities listed on the balance sheet are obligations of a business. The liabilities are the amounts owed to creditors and are the source of the company's assets. Liabilities also are amounts of future services that have been received in advance but not paid for yet. Most of the liability accounts have the word "payable" in it such as wages payable, salaries payable, accounts payable, and interest payable. The owner's equity is also a source of a business assets. On the balance sheet the assets minus the liabilities equals the owner's equity. The examples of owner's equity would be common stock, preferred stock, and retained earnings; just to mention a few.

· Comment on Aug 20, 2014, 5:45 AM

posted by ANDREW WAREING

Aug 20, 2014, 5:45 AM

Balance sheets and income statements are financial statements that allow organizations to get an understanding of the health of the company. A balance sheet shows the company's assets and liabilities at any given moment in time. An income statement shows the financial state of the company over a given reporting period. Balance sheets and income statements are used by the company itself to guide good business decisions but are also used by investors and banks to track investment risk and opportunities.

Myers, C. (2014). The Purpose of a Balance Sheet and Income Statement. Retrieved from http://yourbusiness.azcentral.com/purpose-balance-sheet-income-statement-3520.html

· Comment on Aug 22, 2014, 11:30 PM

posted by Linda Moore

Aug 22, 2014, 11:30 PM

Andrew - The banking industry has to be able to review a company to know if they can loan them money, if they will be able to collect the payments.. Investors want to know if their money will bring them good returns. Is the risk worth it? These are the questions we want to be able to answer when reading the financial statements.

· Comment on Aug 21, 2014, 12:48 PM

Anna DQ2

posted by ANNA WEBB

Aug 21, 2014, 12:48 PM

Balance sheets are financial statements detailing the relationship between business assets (cash, receivables, inventory, supplies, etc.) and liabilities (payables) on a specific date, whereas an income statement lists revenues and expenses for a certain time period, such as a month. Income statements are valuable because a company can predict future performance by analyzing past performance.

· Comment on Aug 21, 2014, 6:15 PM

posted by KEITH MAJORS

Aug 21, 2014, 6:15 PM

The purpose of the income statement is to show companies revenues and expenses. The income statement will compare the revenues generated and the expenses paid out to show if a company is operating in a way that is providing a new income or a net loss. If the revenue is greater than expenses then a company is operating in a way that generates net income. If expenses are greater than revenue then a company is operating in a way that generates a net loss.

The income statement is a statement that current investors and potential investors will study to determine what they would like to do with the corporations stocks. The income statements of a company can provide insight to investors as to how the company is operating. An investor may not want to purchase stocks in a company if they have a history of operating at a net loss. If the companies net income statements show a trend of operating at a net income, the investor may feel more inclined to purchase stock in that company.

· Comment on Aug 21, 2014, 6:23 PM

posted by KEITH MAJORS

Aug 21, 2014, 6:23 PM

The purpose of the balance sheet is to show what a company has as assets and what a company holds as liabilities and as stockholder's equity. The balance sheet should always follow the basic accounting equation of Assets = Liabilities + Stockholder's Equity. The balance sheet can show a companies position at a specific point in time.

The balance sheet is what loan institutions will look at when a company is attempting to gain financing for improving or expanding their business. Loan agents or creditors will be able to analyze the balance sheet and determine the companies' ability to pay of their debts. Creditors compare the assets, liabilities, and stockholder's equity, which is presented in the balance sheet, to make their decisions.

· Comment on Aug 22, 2014, 2:36 AM

posted by Linda Moore

Aug 22, 2014, 2:36 AM

Keith - looking at the balance sheet tells us where we stand at one particular point in time; the "balances" of our assets liabilities and owner's equity. Each of these balances are an accumulation of what we've done so far in our business, no matter how old of a business we have! For example, our assets, our cash balance, our accounts payable.

Class: What else would a balance sheet be useful for?

· Comment on Aug 22, 2014, 6:37 AM

posted by ANDREW WAREING

Aug 22, 2014, 6:37 AM

Balance sheets are useful to potential investors and regulatory agencies in ascertaining the financial health of an organization. These external agencies are limited to the public data that companies have to publish and the balance sheet allows them to make solid investment decisions. They also provide data for the management teams to apply analytical tools to identify trends and relationships based on current and historical data.

· Comment on Aug 22, 2014, 5:36 PM

posted by JASON YORGENSEN

Aug 22, 2014, 5:36 PM

Class,

Balance sheets can also be useful to show what areas of the business are strong and what need improvement. Specifically looking at assets of the business. If the business has a lot of income but not a lot of assets this could help leadership understand what they need to purchase. Also it can do the opposite if lower level managers are spending a lot in expenses it can help find places to cut. Balance sheets are something that are vital to help leaders understand how there business runs daily.

Jason Yorgensen

· Comment on Aug 24, 2014, 9:19 PM

posted by JEREMY ECKLIN

Aug 24, 2014, 9:19 PM

A balance sheet is useful to evaluate the various aspects of a company. For example, since assets are listed under major categories, an internal user can better understand where the value of the company is located. Further, looking at the assets section can show how assets are balanced, whether the company has a high cash amount, or a high accounts receivable amount. If a company regularly operates with low cash amounts and high accounts receivable, one might be concerned about the company's ability to manage operations because of high receivables not correlating into cash in a timely manner. Another useful section is the liability and stockholder's equity section. Evaluating the liabilities of a company compared to their assets helps determine profitability. Further, the amount of stockholder's equity in a company would interest potential stockholders. Last, the kind of debt, whether short term or long term generated and owed by the company would interest investors. The balance sheet contains a great deal of useful information to potential investors and internal managers about the overall financial health of the company.

· Comment on Aug 23, 2014, 12:48 PM

posted by SARA HOMSI

Aug 23, 2014, 12:48 PM

According to this week's readings...

The purpose of the income statement is to show how successfully (or unsuccessfully) your business performed during a period of time by reporting your revenues and expenses. Net income or net loss is reported on these statements by subtracting your total expenses from your revenue. A positive result means you have a net income. A negative result means you have a net loss.

The purpose of the balance sheet is to present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities). Assets include cash and accounts receivables. Liabilities are items such as accounts payable and salaries payable. Stockholder's equity includes common stock and retained earnings. You're assets should always equal your liabilities and stockholder's equity.

· Comment on Aug 23, 2014, 10:02 PM

posted by JOHN RUIZ

Aug 23, 2014, 10:02 PM

Financial statements such as income statements and balance sheets are two of the ways companies keep track of their operations. Each statement serves a very specific purpose as they report the financial status of two different aspects of the company's operations. The first is a company's income statement where the focus is on reporting all revenues, products/services sold, and expenses. The result of an income statement is the identification of both the gross and net profits after the calculations are made from the list of determined expenditures. The resulting calculation of an income statement allows companies to track their earned profits and understand the costs of their operations.

A balance sheet differs from income statements as it reports equities, liabilities, and assets. This is important as it allows a company to track all of the company's assets such as properties owned and contracts, the liabilities a company has such as the operational costs and the equity as the investments that exist within a company. As income statements report profits, balance sheets report a company's total liabilities, total assets, and a company's net wealth. These figures are often represented as a company's economic value.

· Comment on Aug 23, 2014, 10:43 PM

WEEK ONE - DISCUSSION QUESTION # 2

posted by JEREMY ECKLIN

Aug 23, 2014, 10:43 PM

The income statement is important to internal and external users because it demonstrates the results of operations during a given period of time. This period of time usually consists of one month, or a quarter of a year, or a full year but sometimes it is longer if the production cycle of a business is longer than one year. The income statement is used to show the revenue generated minus the expenses during a specific period of time. This information is useful to end users because it demonstrates profitability over periods of time in operation. If revenue exceeds expenses, the company has made a profit. If expenses exceed revenue, the business has a loss during that period of time. Investors use this information to predict future profitability of companies when considering investment opportunities.

The balance sheet compares assets to liabilities and stockholders' equity at a specific point in time. This is usually reported at the end of a month, quarter, or year. Assets consist of anything that can be declared for a cash value belonging to the company. Specifically this includes cash, accounts receivable, supplies on hand, equipment, and prepaid insurance. Liabilities refer to any debt incurred by the company in obtaining financing from creditors, investors, or vendors. Liabilities include notes, accounts, salaries, and interest payable. Stockholders' equity consists of investment from the sale of common stocks to stockholders combined with retained earnings of business operations. The balance sheet is used by creditors to evaluate the likelihood of repayment of investment. It can also be used to evaluate whether companies have sufficient cash on hand to meet immediate liabilities. Both statements are used by potential investors and creditors to attempt to garnish information about the potential success of a business and investments with the company.

· Comment on Aug 23, 2014, 11:10 PM

posted by KATIE LE

Aug 23, 2014, 11:10 PM

Purpose of Income Statement:

Also called the profit and loss statement, or income and expense statement, this document provides a snapshot of the company's profitability during a specific period. An income statement includes a note that says something similar to: "For the period covering January 1 through January 31, 2013." Periods for reporting the financials are company directed and could differ from company to company. One section of the income statement is dedicated to the income and revenue summarized into a sub-total for the period. The other half of the statement reflects the expenses for the same period. The difference between the two numbers determines whether the company was profitable or not during the stated period. If expenses were higher than income, the company experienced a loss during that business cycle (Media, 2014).

Purpose of Balance Sheet:

Another name for the balance sheet is the statement of financial position. Creditors and interested stock investors use the balance sheet to determine a company's financial standing because it lists what a company owns and what it owes. The balance sheet contains summarized information on a company's assets, the things that it owns and its liabilities, the debts it has. When you subtract the company's liabilities from the assets, what is left is called stockholder's equity, the amount that is held by the company's owners or stockholders (Media, 2014).

References:

Media, D. (2014). The Purpose of a Balance Sheet & Income Statement | Chron.com. Retrieved from http://smallbusiness.chron.com/purpose-balance-sheet-income-statement-61847.html

· Comment on Aug 23, 2014, 11:25 PM

posted by Robert Peck

Aug 23, 2014, 11:25 PM

The income statement is a financial form that shows how assets and liabilities were used during a specific period of time and how your business performed over a period of time. An income statement provides a summary of all revenue created and all expenses (by category) incurred by your business. An income statement displays what goods or services were sold which resulted in revenue for the company. Income statements also show earnings or profits of the business.

A balance sheet is a financial form that shows a shot of your business a specific period of time. A balance sheet will always display Assets, Liabilities, and Owner's Equity. A balance sheet identifies current and long term assets and liabilities. Balance sheets usually contain more than one year of financial information on them, which helps businesses and consumers identify trends or changes during a specific time frame.

· Comment on Aug 24, 2014, 7:37 PM

posted by KRISTIAN OGLETREE

Aug 24, 2014, 7:37 PM

DQ # 2: DISCUSS THE PURPOSE OF THE INCOME STATEMENT & BALANCE SHEET.

An income statement is just what the company the made that period it could be a month, year or a week. You can look at the statement to see what the company made and how much is being brought in and what adjustments need to be taken. Where a balance sheet has everything listed including the expense that comes along with the company. The balance Sheet is needed when trying to figure out the big picture for the company and gives them something to look at for the future.

· Comment on Aug 24, 2014, 9:26 PM

posted by LOTTIE BAKER

Aug 24, 2014, 9:26 PM

The purpose of an income statement is to show the productivity of a company for a specific period of time. For example, the XYZ store wants to know the expense for period ending on 07/31/2014, an income statement would be created to provide the requested information. The balance sheet shows displays what a company owns (assets) and what is owes (liabilities) within in a specific time frame. For example, ABC corporation is preparing a balance sheet to show total assets, liabilities and owner equity for month ending in 01/31/2012.

K ONE - DISCUSSION QUESTION # 1

posted by Linda Moore

Aug 19, 2014, 12:40 AM

WEEK # 1: Class: Please post your responses to the following discussion question:

DQ # 1: DISCUSS THE MEANING OF CASH VS. ACCRUAL ACCOUNTING.

· Comment on Aug 19, 2014, 8:09 AM

posted by DONALD DENNIS

Aug 19, 2014, 8:09 AM

The cash method and the accrual method (or sometimes called cash basis or accrual basis) are two main methods of keeping track of a business's income and expenses. Each method will have their pros and their cons, but it's all about what method will benefit the business the most. Each method only is different in terms of timing of each transaction. This includes the sales and purchases, as well as credit and debits to and from your accounts.

The cash method is more commonly used, and is more times than not used for small business. In regards to the cash method, income is not counted until cash (of some form) is actually received. Expenses are not counted until they are paid.

The accrual method is used for larger business or corporations. Transaction are counted when an order is made, item delivered or service are being worked on. Meaning by this, the income is counted when the sale occurs. Expenses are counted when you receive the good or service. Actual money doesn't have to be seen, and the actual money isn't counted for or against your checking account to record that transaction.

I have seen this happen from time to time as a buyer. When I use PayPal or even shop at a particular store, sometimes it takes a couple days for the actual transaction to post to my account, although the store has received my order and is in the process of completing my order even before money is taken out of my account (the store probably hasn't seen money yet either).

· Comment on Aug 19, 2014, 6:59 PM

posted by Linda Moore

Aug 19, 2014, 6:59 PM

Donald - Good synopsis! The Accrual method is a better matching method in many instances. We see that sales and expenses happen and are recorded in the same month; whereas if we wait for the accounts receivable or payable to happen, that is cash to change hands, this will result in another month. Small business has many instances that we see cash transactions that match regardless. However, in a larger more complex organization, it is essential to capture matching transactions, to be able to see the true picture of the profits or losses.

Comments / Questions?

· Comment on Aug 19, 2014, 8:00 PM

posted by Mark Pollack

Aug 19, 2014, 8:00 PM

Question: Do companies have to factor nonpayment or slow payment if they use the accrual method? I would imagine there are calculated risks by not counting revenue by whats on hand.

· Comment on Aug 20, 2014, 9:05 PM

posted by Linda Moore

Aug 20, 2014, 9:05 PM

Mark - yes, there has to be a way to include those "not paying" which would be "uncollectible accounts expense". If you have a lot of sales, you also can set up an "allowance for uncollectible accounts" as a percentage of sales, for example. We may have sales or revenue in our organization but we also have to be careful that we are selling "on account" to those who will indeed pay us. If our credit is too easy, we may get sales that won't be collectible.

Good Post! Class: Comments / Questions?

· Comment on Aug 21, 2014, 5:52 PM

posted by JASON YORGENSEN

Aug 21, 2014, 5:52 PM

Class,

I agree with this post. Working in a bank I can see how this will apply. It is interesting when you see a number of companies that have financing for there product. Those companies push the fact that they will approve anyone no matter what the credit. This type of advertising will attract any type of person. The issue will be there ability to pay the loan or credit product back. What I think is unique is some of those companies will use an independent companies to get the financing through. This is a good business model for the company because they get paid and the risk moves over to the loan company.

Jason Yorgensen

· Comment on Aug 22, 2014, 11:37 PM

posted by Linda Moore

Aug 22, 2014, 11:37 PM

Jason - the fact remains that if there are too many of these bad loans, the loan company or bank will not survive. In our current economy, we saw this with so many foreclosures, and we will take a long time to recover. We are starting to see some improvement, but the banks will be extra cautious for a long time. In your bank, I am sure you see this happening, and the business has to make money so the bank has to give out loans. However, the bank has to keep going, because without loans, there is no hope of them earning interest revenue.

· Comment on Aug 24, 2014, 8:24 AM

posted by JOHN RUIZ

Aug 24, 2014, 8:24 AM

This is something that has really hit home for myself as I just started a new career this month at Mattress Firm and we work with 3 different financing companies that provide several different types of interest free financing loans for various periods. At Mattress Firm we can get a bed financed to anyone, but it does not mean that you can actually afford the monthly payment. It really comes down to you knowing your monthly expenses and if you can afford to pay anywhere between $45 to $180 a month for a bed for any where between 90 days to 6 years. Most financial lenders will provide the funds, but you have to really ask yourself if you can afford the payments.

· Comment on Aug 24, 2014, 9:00 PM

posted by JEREMY ECKLIN

Aug 24, 2014, 9:00 PM

John, your example also hits home with me. I actually regularly use zero interest financing for various large purchases the last few years. So far, I have been able to beat the bet if you will and pay off the debt prior to zero interest incentive expiration. I do understand the risks associated with this kind of financing. For example, a few years ago, I was interested in purchasing a new television and was offered a 36 month zero interest card with Best Buy to make the purchase. I took the offer and was able to afford the monthly payment in order to pay off the debt prior to the interest spike after three years. While I have been able to take advantage of these offers so far, I can see the risk involved in these offers especially if someone takes on multiple lines of credit at the same time. So, as you point out, many financial lenders will provide funds to potential borrowers, but the borrower needs to understand the consequences if they are unable to afford the monthly payments.

· Comment on Aug 23, 2014, 9:42 PM

posted by SARA MARKEL

Aug 23, 2014, 9:42 PM

I see this in my company with the amount of sales and merchandise we sell every week due to the pre-billing and the allotted amount allow to pre bill to company. I see it's with the grocery trucks because those trucks are delivered everyday and can be very pertinent to the amount of onhands that are needed to keep up with the demand of consumables items. Good Post!

· Comment on Aug 20, 2014, 5:38 AM

posted by ANDREW WAREING

Aug 20, 2014, 5:38 AM

The cash method is often used by small businesses. It is based on the method that income is not counted until the cash is received and expenses are not counted until they are paid. The accrual method recognizes transactions when the order is made regardless of when the money is actually received. The accrual method must be used if a business has sales of $5 million or more. It is used by larger businesses as it allows the organization to obtain greater insights into the flow of revenues and expenses.

Cash vs. Accrual Accounting. (2014). Retrieved from http://www.nolo.com/legal-encyclopedia/accounting's-29513.html

· Comment on Aug 20, 2014, 11:17 PM

posted by Linda Moore

Aug 20, 2014, 11:17 PM

Andrew - good post! In order for a large organization to understand how they are doing, they must use accrual accounting. In order to get good and matched numbers, you have to be able to have the transactions together within the period that they occur; such as revenues and expenses. This tells us how much we have made, and what it cost us for those particular sales levels.

· Comment on Aug 21, 2014, 6:13 AM

posted by ANDREW WAREING

Aug 21, 2014, 6:13 AM

Linda - I read an article that referenced some research from Criterion Research Group LLC. The research showed that many companies overestimate the amount of accruals. This can lead to a misleading representation of the financial health of the organization. In some worst cases, where companies made significant errors, class action lawsuits were made by shareholders. In summary, the study showed that companies that use more accruals actually underperform companies with fewer accruals.

I guess there is a balance when calculating accruals that ensures good accounting practices are adhered to?

Colter, G. (2004). Accrual Accounting Can Be Costly. Retrieved from http://online.wsj.com/news/articles/SB108871005216853178

· Comment on Aug 24, 2014, 8:30 AM

posted by JOHN RUIZ

Aug 24, 2014, 8:30 AM

It really seems like either method can be used at any level of company, but even though accrual accounting provides a bigger picture, it seems to come with a few risks. It seems that in order for a company to really be able to latch onto the concept of aggressive expansion, it really does need to use accrual accounting as the big picture always allows for ore realistic ideas of what can actually be done and what cannot. Living by cash accounting alone seems simple enough, but it hinders the concept of clear images of forecasting as it only track what has either been received or paid and not what will be.

· Comment on Aug 24, 2014, 8:17 AM

posted by JOHN RUIZ

Aug 24, 2014, 8:17 AM

When it comes to accounting I am able to see the benefits of accrual accounting and cash accounting, but also the draw backs from both systems of accounting. It really seems like a system of cash accounting for receivables and accrual accounting for expenditures really would be better than just using one or another. It is a great idea to know what should be coming your way, but there are so many times when deals are made, contracts are signed, and then the cash never comes. Depending or planning on what is not actually in hand can lead to some really bad decision making. On the expenditure side however, you should plan to always pay what is owed and so your budget really should revolve around you only spending after all expenditures have been accounted for.

· Comment on Aug 24, 2014, 5:52 PM

posted by TIFFANY MINGO

Aug 24, 2014, 5:52 PM

Good explanations and points Donald. I definitely see both methods in everyday or monthly transactions I make. A good example is something like a food or clothes transaction where the money is given and taken in account right away. Other examples are monthly accrual transactions that I have like gym memberships where you are able to use the facility before the money is taken from your account. I think both methods are efficient and are accommodating to us because it is not always easy or on hand to pay for the product or service.

· Comment on Aug 19, 2014, 7:21 PM

posted by patricia surber

Aug 19, 2014, 7:21 PM

Every company has an accounting period which is one year long that is called a fiscal year. That fiscal year does not have to start at the beginning and end of the calendar year because it can begin at anytime of the year. Many companies want to end their fiscal year when they are not busy because gathering the information for their accounting purposes takes time. Many companies want to end their fiscal year when their inventory is low because it is easier to compile accounting data at these times. Accrual accounting is an assumption that helps develop accounting standards. The accrual accounting takes place at the times that events occur so the financial statements are recorded at these times. These financial statements are compiled through revenue and expenses. The cash accounting are receipts that are recorded during the fiscal year in the form of cash that is used by small businesses because it is easier and they can see what money they have right away.

· Comment on Aug 22, 2014, 7:39 AM

Response from Patricia to Sara

posted by SARA MARKEL

Aug 22, 2014, 7:39 AM

Patricia,

This is something my company Wal-Mart does when inventory Is at it low, The fiscal years starts in Feb. Its funny you say this because it relates as to why the book inventory is the lowest, coming out of a major holidays and clearance, the backroom is not as full, my store runs with about 7 million in inventory at any given time and it fluctuate throughout the upcoming events or holidays. I have seen it at 7 million and then a month later drop to 4 million depending on the warehouses and the events taking place. Great Post.

· Comment on Aug 24, 2014, 5:26 PM

posted by patricia surber

Aug 24, 2014, 5:26 PM

Hello Sara:

I know that making calculations when inventory is low would be much easier than when the whole warehouse is full. I work in the HR department and financial calculations usually ends when the project ends. If the project is a continuous yearly affair then the calculations are done every quarter from the beginning of the project no matter when the project began in the year. The calculations are needed no mater how business or slow we are. So if a company can do calculations when the inventory is smaller than they are lucky.

· Comment on Aug 24, 2014, 6:01 PM

posted by TIFFANY MINGO

Aug 24, 2014, 6:01 PM

I agree, companies have their fiscal year at different times of the year depending on things such as inventory and when they want to look at their income statements and balance sheets. I know certain businesses we deal with have their fiscal years at the end or first of the new year as the 12 months is the time period they are looking at before making decisions for the new year. I always wondered what specific reasons companies had for their fiscal years at different times and from this chapter I learned they do not always have a choice as it is based on when the industry started. Also, I learned that they tend to not pull their reports when there is "down time" or when things are requiring work and attention. They want to know when there numbers are the best and why it works so well that way.

· Comment on Aug 19, 2014, 7:58 PM

posted by Mark Pollack

Aug 19, 2014, 7:58 PM

The cash method and the accrual method seem to differ on when the income is actually earned. For clarity, the cash method only recognizes the sale once the cash or check has cleared into the account of the business. This method is typically used in small businesses. As a former business owner, we used this method to calculate profitability because we did not have the capital or the resources to chase debtors.

The accrual method accounts for the income the moment the order is placed. If we think about large organizations, like Best Buy, they would possible count the sales the moment the order was placed online regardless of payment. This process is also true for any product or services completed. Large organizations have the financial ability to recognize profits from this point versus a smaller company.

I owned an animal hospital and we were a cash upfront organization. Our company did not have deep pockets or credit departments to chase those who owed us for services rendered.

· Comment on Aug 22, 2014, 7:43 AM

posted by SARA MARKEL

Aug 22, 2014, 7:43 AM

Mark,

What about emergencies and people who just can't afford to pay for the emergency care needed for there loved one (Fury Friends). DO you offer another source such as care credit for financing. Do you allow for payment over time?

Emergency is something people don't plan for and just saying if they found this animal hurt and tried to be a good neighbor, would you offer a discount rate for helping out an injured animal. Having this type of compassion for the animal instead of the dollar amount will lead to trust in knowing to take the injured animal to you and your team and knowing that they can afford the care will get them to refer you to there friends and family which in turn will lead to better revenue and profit for you business I would think, just asking.

· Comment on Aug 24, 2014, 4:17 PM

posted by Mark Pollack

Aug 24, 2014, 4:17 PM

Hi Sara,

Great post and question. Yes, we would offer care credit, but we also had an angel fund. We had a weathy client donate $2,000 to this fund and ask people if they would like to donate. If a pet comes in and is in need of a surgery or service, we first really determine need. We do go through a vetting process to make sure we are using the money correctly, and then perform the service.

From an accounting standpoint, we keep the money in a separate account and the accountant "sees" it only when it is processed to cover a service. I hope this answers your question.

· Comment on Aug 20, 2014, 3:56 PM

posted by JASON YORGENSEN

Aug 20, 2014, 3:56 PM

Class,

The cash and accrual method of accounting are two ways that businesses can evaluate orders. The cash method is one that is used for smaller or start up businesses. It will only count and order or income when it is paid for by the customer. This means that it will not count things when cash, check, credit/debit are not used. The benefit for using the method with smaller businesses is to ensure that they are not counting things as income and overspending. Especially if it is something where the customer will change there mind before or after the order is placed. This can cost the business money in the long run and possibly impact other customers.

The accrual method happens when transactions or orders are counted when it is received from the customer. In this form of accounting it does not matter when the item is paid for it can be before or after the item is delivered. This can be risky for businesses because the customer can change there mind at any moment costing the business money on a product or service. Also if the customer does not want to pay after the product or service is preformed it can go into legal ramifications.

Jason Yorgensen

· Comment on Aug 22, 2014, 3:22 PM

posted by TIFFANY MINGO

Aug 22, 2014, 3:22 PM

Overall I believe the cash method is used more among companies because in this circumstance money does not have value or is not put within the system until it is received. This goes the same for someone in the accounts payable department where they do not count something as an expense until it is paid. On the other hand the accrual method is where when the sale occurs you consider it paid and that you have the income. For expenses it is when the service or good is given and you may have not received payment for it yet.

In the accounting department we majority of the time use the cash method when taking in checks, but sometimes we have what is called a work ticket where we go and perform special work and it is invoiced and enough it may not have been paid yet we will accrue for it assuming the money will be coming per the terms of the contract set up.

· Comment on Aug 23, 2014, 9:01 PM

posted by JOHN RUIZ

Aug 23, 2014, 9:01 PM

As businesses conduct their accounting practices they use one of the accounting systems of either cash accounting or accrual accounting. The first form of cash accounting is the simplest form of accounting as this systems function similarly to individual checkbook practices. Cash accounting revolves solely around actual complete cash practices of either money actually received or of payments completed. Cash accounting does not track or take into consideration any possible future payments due to services rendered. It is all about what is actually in or what is actually out.

Future transactions are taken into consideration through the system practices of Accrual accounting. In accrual accounting unlike in cash accounting where you only track what has been received, you book all forms of revenue as soon as deal or contract has been made. The same is applied to expenses as they are accounted for as soon a deal is struck or acceptance has been made for an obligation to pay. There are both pros and cons to either system of accounting as cash accounting is very specific to what is happening at the very moment, but accrual accounting provides a better concept of what the future possible holds, but is hard to rely on as promises are not always kept.

· Comment on Aug 23, 2014, 10:19 PM

posted by JEREMY ECKLIN

Aug 23, 2014, 10:19 PM

Cash accounting involves accounting for and assigning receipts during periods which they were received and expenses during periods which they were paid on the financial statements. Conversely, accrual accounting involves recording receipts and expenses when they are incurred instead of when they actually cleared. Accrual accounting is important for most corporations, especially those who produce products with large and lengthy production cycles, often of more than one year. For example, if Boeing received an order to create twenty new 747 Class Jetliner's, and they used cash accounting, their business would appear to lose money during the production cycle because the company would incur high costs due to production without accounting for any revenue. As a result, Boeing uses accrual accounting to report their revenue and expenses when they are incurred in order to demonstrate the true value of their operations and income potential. While most large corporations use accrual accounting to most accurately report their earnings and expenses, small businesses may find cash accounting more useful in order to better follow cash flows and available cash for expenses and investment. It is important to understand which form of accounting was used on financial statements about a business in order to make accurately informed financing and investing decisions about a business.

· Comment on Aug 23, 2014, 10:50 PM

posted by Robert Peck

Aug 23, 2014, 10:50 PM

Cash basis accounting is a method of accounting used when a payment is received for the trade of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds no matter when the sale was made. When using cash basis accounting financial statements display revenues and expenses based on when transactions are entered rather than when revenues were earned or expenses incurred. For example, if my company obtains a huge contract for business during the year but will not get paid until the contract is complete. However, during the year we incur expenses as they happen. So in a nut shell one year our expenses may be larger than our profits due to the contract not being completed until a later date in the future all the while our expenses are being recorded as they occur in the calendar year. this method of tracking expenses and revenue may be simple but it may cause your organizations finances to appear as a profit or loss.

Accrual basis accounting is a method of accounting used when revenue is earned; revenue is earned when goods are delivered or services are performed; and cash is received. All expenses are recognized during the time the revenue is recognized. Financial statements match revenues to the expenses incurred in earning them. This method provides a better picture of organization or company's current economic situation. For example, if company A sells 500 widgets to company B for $10,000 on June 1st and cash is received on June 10th. Company A's financial records will reflect the revenue from the sale being recognized on June 1st although the cash is not received until June 10 this process allows for a clearer picture of the company's revenue and expenses.

· Comment on Aug 23, 2014, 11:33 PM

posted by EIMI YAMADA

Aug 23, 2014, 11:33 PM

Cash accounting is generally used by small businesses. In the cash method, the income is counted towards the business income once the actual payment is made. Not when the service is rendered. For instance, if a company provides a service in March, but is not paid until May, that income would be counted as May income, and not as March income, even though the service was completed in March. The income is counted when it is actually received.

In Accrual income, the income is counted when the service is rendered or when the transaction occurs. Though the company many not get the money for a couple months, the income is counted right away. It is not counted when it is actually received. This works for many large companies, in order to properly track transactions as they occur.

The most important thing is that a business sticks with one method. If both methods are used, it can easily cause tracking issues for the company. In order to keep payments tracked, the business needs to decide which method works better for their system, and stick with that one method in order to properly track sales, goods, sold, payments, and services rendered.

· Comment on Aug 24, 2014, 12:28 PM

posted by KATIE LE

Aug 24, 2014, 12:28 PM

Very nice explanation. To me, I believe the cash method is easier and make more sense when it comes to dealing with the IRS. The cash method only record when the money is received. Not so with accrual-basis. If you get a huge purchase order from a new customer, that would show as income; then the IRS wants their 30%, 40%, etc., but since the customer hasn’t paid, you have to pay the taxes from your pocket. This method will not benefit small businesses.

· Comment on Aug 24, 2014, 8:51 PM

Anna: WEEK ONE - DISCUSSION QUESTION # 1

posted by JEREMY ECKLIN

Aug 24, 2014, 8:51 PM

Eimi, your explanations of the differences were spot on. I specifically liked how you point out the importance of choosing a method and sticking with it. It is important for a company to use one type of accounting throughout all of their financial reports in order to provide relevant and faithful representation of the information. So, companies should use the system which bests fits the model of their company. As a result, small business, whether partnerships or sole proprietorships, usually benefit from cash accounting, where large corporations benefit from accrual accounting. That being said, while consistency is important within the financial reports, internal users may find certain uses from evaluating the company's financial position from both accrual and cash accounting perspectives. I could see how there may be value in assessing the information and data from each point of view in order to better understand the ebbs and flows of costs associated with production and revenue generated from sales. Do you think there could be some value for internal users of the financial reports from both perspectives?

· Comment on Aug 24, 2014, 7:44 AM

posted by ANNA WEBB

Aug 24, 2014, 7:44 AM

A company using cash-basis accounting will only document revenue once the cash is received. Alternatively, the accrual basis accounting method records both revenue and expenses as the events occur. Accrual basis accounting is the preferred method because of its revenue and expense recognition principles that is not followed when using cash-basis accounting. A company's true financial performance under cash-basis will not be accurate because the resulting numbers when using cash-basis may be misleading.

· Comment on Aug 24, 2014, 6:12 PM

Re: Anna: WEEK ONE - DISCUSSION QUESTION # 1

posted by JASON YORGENSEN

Aug 24, 2014, 6:12 PM

Class,

I almost wonder is there is more risk when using a cash based accounting system. I would like to see what the statistics are for businesses that do not document everything that was sold in the company. I know that businesses are always looking to save money with tax deductions or giving money to charities. I would imagine with a cash based system they could hide some of that money that came into the company or not report it. I would think this would be difficult with any other accounting system because there are records of people waiting for orders.

Jason Yorgensen

· Comment on Aug 24, 2014, 12:21 PM

WEEK ONE - DISCUSSION QUESTION # 1

posted by KATIE LE

Aug 24, 2014, 12:21 PM

The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if cash has not been recieved or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses.

Reference:

http://www.investopedia.com/ask/answers/09/accrual-accounting.asp

· Comment on Aug 24, 2014, 5:45 PM