New PDF release: How to Read a Financial Report: Wringing Vital Signs Out of

By John A. Tracy

Hidden someplace between the entire numbers in a monetary file is extremely important information regarding the place an organization has been and the place it truly is going. this can be specifically appropriate in gentle of the present company scandals. The 6th variation of this bestselling e-book is designed to assist someone who works with monetary reports--but has neither the time nor the necessity for an in-depth wisdom of accounting--cut throughout the maze of accounting details to determine what these numbers relatively suggest.

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Extra resources for How to Read a Financial Report: Wringing Vital Signs Out of the Numbers 6th Edition

Sample text

Charging off prepayments immediately to operating expenses would be premature—there would be a robbing Paul (expenses higher this period) to pay Peter (expenses lower next period) effect on profit. Generally accepted accounting principles (GAAP) demand that operating costs paid in advance must be put in the prepaid expenses asset account, and not charged to expense immediately (assuming the amounts are material, or sizable enough to make a difference). The prepayment of operating expenses decreases cash, of course.

Sometime later, when cash is collected from customers, the cash account is increased and the accounts receivable account is decreased. Extending credit to customers creates a cash inflow lag. The accounts receivable balance is the amount of this lag. At year-end the balance in this asset account is the amount of uncollected sales revenue. Most of the sales made on credit during the year have been converted into cash by the end of the year. Also, the accounts receivable balance at the start of the year from sales made last year was collected.

On the first day of the year it starts with a zero balance; at the end of the last day of the year it has a $52,000,000 balance. In short, the balance in this account at year-end is the sum of all sales for the entire year (assuming all sales are recorded, of course). In this example the business makes all its sales on credit, which means that cash is not received until sometime after the day of sale. This company sells to other businesses that demand credit. ) The amount owed to the company from making a sale on credit is immediately recorded in the accounts receivable asset account for the amount of each sale.

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