All To Know About Preparing Cash Flow Statements
Another part of accounting basics that all accountants should take care to remember would be the procedure of cash flow statement preparation. If you are a beginner with accounting basics, here are some things to be acquainted to:
A comprehensive cash flow statement should involve the cash that was generated/used in operating, investing, supplemental information as well as financing activities. As a standard accounting practise, each different sector can be reported with emphasis on different formats since their focus will be on different factors. All accountants are advised to carefully monitor the corporation’s activities so as to accurately prepare their cash flow statements.
One of the general accounting basics often observed and practised in cash flow statement preparation would be inventory purchase when it comes to displaying changes in operational activities of a corporation. For example, if a corporation invests in the purchase of inventory stock, accountants should make note of the cash decrease in the cash flow statements under operational activities. However, this should not affect the profit or loss, since the corporation technically would not have sales or expenses.
This decrease is noted as inventory is increased. Pay attention to the financing activities section, if any personal investment has been made before the purchase of inventory. The financing activities section should match up with the increase in overall investment increase. Make sure net change of the investment and the cash outflow regarding inventory be subsequently verified in the balance sheets.
Another accounting practise often relied on would be the calculation of revenue and expenses. Presuming that the corporation sold products or services to a customer and issued an invoice that has been paid- Accounting basics dictate that the revenue is only recognised during the time of delivery for products/services and not when the payment is received. The expenditure of the corporation appears in the cash flow income statement when they match up with the corporation’s revenue and not when the products/services are paid.
For corporations who require dealing with supplies, the supplies expenses account only reflects changes when the supplies are used. Standard accounting basics reveal that whatever cost the supply order displays will be recorded on the balance sheet under asset account supplies. If payment has yet to be made, liabilities are recorded under the accounts payable section.
If there are depreciation expenses, another good accounting practise worth noting would be that there will be situations where the amount will require to be added back to the net income. The situations that fit into this category of treatment would be when there is no cash spent and yet the depreciation expense account entry results in net loss. In order to convert the income statement’s bottom line into the cash used in operating activities or other relevant areas, accountants will need to add back or remove the depreciation expense.
