The Statement Of Cash Flows Is An Optional Financial Statement. When Profits on Financial Statements Confuse

You are searching about The Statement Of Cash Flows Is An Optional Financial Statement., today we will share with you article about The Statement Of Cash Flows Is An Optional Financial Statement. was compiled and edited by our team from many sources on the internet. Hope this article on the topic The Statement Of Cash Flows Is An Optional Financial Statement. is useful to you.

When Profits on Financial Statements Confuse

Accounting can be a funny thing, to the untrained eye, profits (or losses) in financial statements create more confusion than anything else.

Every entrepreneur knows his bank balance. But they do not have a firm understanding of the meaning of profit. No, these are not bank/cash receipts, minus payments. Having a healthy bank balance is great, but without an interpretation of “profit”, from an accounting perspective, that healthy cash balance is at risk.

Financial reports;

Accountants prepare financial statements, not the business owner (unless he is an accountant of course). The Balance Sheet in the sense of IFRS regulations has now been replaced by the “Statement of Financial Position. The Income Statement, replaced by the “Statement of Comprehensive Income”. These definitions should make it easier for the layman to understand financial statements.

The statement of financial position is exactly what it says. Financial position of the organization. Where does the organization stand? Does he own property, does he dispose of funds (money and cash equivalents). Is it charged? If so, how much? The combination of these above-mentioned factors immediately gives management the ability to assess solvency (debt-to-asset ratio). Liquidity can be measured (current assets minus current liabilities).

Statement of Comprehensive Income (Income Statement) Accounting forces us to record the bigger picture. Unlike receipts and disbursements, we record income, even if not received, and expenses, even if not paid. Loan income, plus cash income is therefore a fair reflection of total income (remember, comprehensive income?) The user of the income statement will need to familiarize themselves with the full scenario. So clearly any recorded revenue will increase “profit” as cash increases, so at that point the books might show a profit and cash flow would be low. The beauty of accounting is that the corresponding credit sales will be recorded under debtors or receivables.

Example: Business sales are R10k, cash. Expenses totaled R6k, and property purchase totaled R2k.

Interpretation: (R10-R6k-R2k)=Bank balance/cash=R2k

Profit (R10k-R6k)=Profit R4k

Property R2k. Is the difference in R2k deceptive? No, not at all. Remember, any asset (assets, receivables) can be turned into “cash” by resale. So if the R2k asset is sold, that could add another R2k to the cash. So R2k+ R2k bank balance= R4k!. That’s exactly what comprehensive gain understanding is!!

Cash flow statement

Because of all this confusion, the cash flow statement was introduced. It used to be optional, but is mandatory, precisely because of the confusing nature of profits. The Cash Flow Statement combines the Statement of Financial Position with the Statement of Comprehensive Income and clearly shows the flow of “cash” only.

Don’t hire reporting accountants who ignore cash flows in financial statements. This basically explains all of the above. By reading this report, you will know where all your profits have gone!

Video about The Statement Of Cash Flows Is An Optional Financial Statement.

You can see more content about The Statement Of Cash Flows Is An Optional Financial Statement. on our youtube channel: Click Here

Question about The Statement Of Cash Flows Is An Optional Financial Statement.

If you have any questions about The Statement Of Cash Flows Is An Optional Financial Statement., please let us know, all your questions or suggestions will help us improve in the following articles!

The article The Statement Of Cash Flows Is An Optional Financial Statement. was compiled by me and my team from many sources. If you find the article The Statement Of Cash Flows Is An Optional Financial Statement. helpful to you, please support the team Like or Share!

Rate Articles The Statement Of Cash Flows Is An Optional Financial Statement.

Rate: 4-5 stars
Ratings: 7057
Views: 60954400

Search keywords The Statement Of Cash Flows Is An Optional Financial Statement.

The Statement Of Cash Flows Is An Optional Financial Statement.
way The Statement Of Cash Flows Is An Optional Financial Statement.
tutorial The Statement Of Cash Flows Is An Optional Financial Statement.
The Statement Of Cash Flows Is An Optional Financial Statement. free
#Profits #Financial #Statements #Confuse

Source: https://ezinearticles.com/?When-Profits-on-Financial-Statements-Confuse&id=9382817

Related Posts