Under accrual basis accounting, the transactions that change a company’s financial statements are recorded in the periods in which the events occur. For example, companies recognize revenue when they earned, even if cash was not received. Similarly, expenses are recognized when they incurred, even if they was not paid.
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Accounting in Health Care Setting Assignment Help
Cash or Accrual Accounting
Financial manager will use accrual accounting method as compared to cash accounting for the health care organization.On the other side our business accounting assignment help says that, cash basis accounting violets the revenue recognition principle because it does not record the expenses when incurred. To avoid future concerns that can be caused due to use of cash basis accounting, financial manger will prefer the use of accrual-basis accounting.
For example, if the company applies for a bank loan and the bank requires financial statements using generally accepted accounting principles, then it is necessary for the firm to prepare all financial statements on an accrual basis, thus, there is need to change cash-basis income statement to accrual-basis accounting basis (Nikolai, Bazley & Jones, 2009).
Factors involved in Creating and Interpreting of Financial Statements
The entity principle is an important factor to create and interpret the income statement and statement of changes in equity. Income (the excess of revenue over expenses) comes from a large number of individual operations within an organization and is aggregated in the statement of revenues and expenses (Cleverley, Cleverley & Song, 2010). Similarly, accounting period is another factor that intent to prepare both these statements for a specific period concept. Additionally, these statements are also prepared and analyzed by considering the accrual concept factor (consideration of accrued revenues and expenses in an accounting period). Among all these factors accounting period and accrual concept are two important factors from stakeholders point of view. It is because accounting period concept enables stakeholders to assess company’s financial performance at periodic intervals (Hansen & Mowen, 2006). Concurrently, the accrual concept enables them to determine the true income of the company for each accounting period.
Primary Interrelationships between the Balance Sheet and the Income Statement
Primary interrelationships between the balance sheet and the income statement are known as articulation. One of the primary interrelationships is that an item on the income statement helps in explaining the change in an item on the balance sheet from one period to another. For example, the retained earnings balance as reported on the balance sheet comes from the beginning retained earnings balance plus net income for the period minus dividend paid (Albrecht, Stice & Stice, 2010).
There is also another relationship between the balance sheet and the income statement. For instance, if revenues are greater than expenses, it causes to increase in net assets. It is the reason that increase in the value of account receivable on a balance sheet reflects as revenue on an income statement even though there was no cash transactions. Similarly, an increase in accounts payable is termed as an expense on the income statement even though no cash has been expended.
The third interrelationship between both these accounts can be identified through the use of capital and surplus account. This account shows that the most important contributor to the change in surplus (difference between ending and beginning balance sheet value) is net income (Lombardi, 2006). Among all these interrelationships, the second one is the most useful to financial analysts. It is because through this they can analyze the impact of operating activities on firm’s total assets and liabilities.
Assessment of the Structure and Content of Statement of Cash Flows
A cash flow statement is prepared by taking into account “sources” and “Application” of cash. In the structure of this statement, no schedule of changes in working capital is prepared. However, the item of this schedule such as current assets and liabilities are shown elsewhere in the solution. These items find adjustments at two places; first, the current assets and liabilities which have been appropriated in the P&L account (accrued income, prepaid expenses, outstanding expenses, etc.) are adjusted back to profit earned during the year (Hawawini & Viallet, 2010). Secondly, the remaining current assets and liabilities such as debtors, stock and creditors are shown straight in this statement. In this way, structure of cash flow statement is inappropriate in concern to the demonstration of non-cash items.
On the other side of this assignment help, main content of this statement is sources of cash whether inflow or outflow of cash. Main sources of cash inflow are cash from operations, sale of fixed assets and investment and issues of shares, bonds and debentures. In contrary, the main sources of cash outflow are loss from operations, purchase of fixed assets and investment and sale of shares, bonds and debentures and payment of interest and dividend. In this way, content of this statement also not include adjustments related to the non-cash income and expenses (Debarshi, 2011).
Thus our business accounting case study assignment help experts says that, to improve the structure and content of cash flow statement, firms should also consider the non-cash transactions that had taken place during the same period. This improvement will make a difference in a financial reporting and analysis. It is because as due to inclusion of non-cash transactions in this statement, financial analysts can reduce the gap between net cash flow and the net profit for the same period (Debarshi, 2011). Additionally, in the absence of income statement, companies can use this statement as a substitute to analyze operational effectiveness for a certain period.
Below are some of the references used that you can use to further explore these topics. If you need any guidance, please do write to us.
Albrecht, W. S., Stice, E. K. & Stice, J. D. (2010). Financial Accounting. USA: Cengage Learning.
Cleverley, W., Cleverley, J. & Song, P. (2010). Essentials of Health Care Finance. USA: Jones & Bartlett Learning.
Debarshi, B. (2011). Management Accounting. South Africa: Pearson Education South.
Hansen, D. R. & Mowen, M. M. (2006). Managerial Accounting. USA: Cengage Learning.
Hawawini, G. & Viallet, C. (2010). Finance for Executives: Managing for Value Creation. USA: Cengage Learning.
Kimmel, P. D., Weygandt, J. J. & Kieso, D. E. (2010). Accounting: Tools for Business Decision Makers. USA: John Wiley & Sons.
Lombardi, L. J. (2006). Valuation of Life Insurance Liabilities: Establishing Reserves for Life Insurance Policies and Annuity Contracts. USA: ACTEX Publications.
Nikolai, L. A., Bazley, J. D. & Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning.