Presentation Of Financial Statements And Cash Flow Essay

895 Words Apr 3rd, 2016 4 Pages
Question 1: Presentation of Financial Statements

A. Income statement and Cash flow statement

Accounting profit: The process of accrual accounting recognises earned revenue and incurred expenses (Deegan & Samkin, 2013). It is the difference between the revenue earned by a company and its costs. There are certain adjustments in consideration like depreciation, interest and tax. It consists of non-cash items as well. It is also called the net income of the company. It considers both cash received/paid and to be received/paid in future (Robertson). Profit data is based on numerous subjective and certain creative judgements (Deegan & Samkin, 2013).

Cash flow: It is the difference between the actual cash received and cash payments over a specified period of time. It helps the investor to understand the ability of a company to estimate future cash flow, meet financial obligations, ability to obtain external financing, possible liquidity shortage. Cash flow data is more factual or objective (Deegan & Samkin, 2013).

These two factors are considered when analysing the financial health of a company. The major difference between the two numbers is the figure used for calculations. One considers only cash items and other considers non-cash items as well (Robertson). Companies showing profit might fail due to lack of cash management.
Example: a firm shows a profit based on its sales accrual. But later in time, the customer defaults and now the company is under stress from not having…

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