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2/27 Warm-up

2/27 Warm-up. Nov-1: Business purchases $500 worth of inventory on credit from a supplier. Nov-8: Customer buys $500 worth of merchandise for $750 on credit. Nov-22: Customer pays their bill ($750). Dec-1: Business pays their supplier ($500).

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2/27 Warm-up

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  1. 2/27 Warm-up Nov-1: Business purchases $500 worth of inventory on credit from a supplier. Nov-8: Customer buys $500 worth of merchandise for $750 on credit. Nov-22: Customer pays their bill ($750). Dec-1: Business pays their supplier ($500). • Identify how much profit did this business generated? • Identify when the following events are recorded in the financial records; • Revenue • Expense • Cash Receipt • Cash Payment

  2. Recording Revenue & Expenses Realization Principle Matching Principle Revenue matched with costs associated with producing the revenue Not when payment made • Revenue recorded at the time of sale • Not when payment received

  3. Profit vs. Cash Flow • AccrualBasis = recording revenue & expenses as they are earned & incurred (not when they are paid) • Accrued Revenue = Recording Revenue Before Receiving Cash • Accrued Expense = Recording Expenses Before Paying Cash • Deferred Revenue = Recording revenue after receiving cash • Deferred Expense = Recording expense after paying cash

  4. Accrued Revenue Products are sold for $5,000 on May 1, 2010 and cash is received on May 10, 2010. • May 1, 2010 = Revenue Recorded • May 10, 2010 = Cash Received

  5. Accrued Expense Business receives a $1,000 bill for electricity usage on May 1, 2010 and cash is paid on May 10, 2010. • May 1, 2010 = Expense Recorded • May 10, 2010 = Cash Paid

  6. Deferred Revenue On May 1, 2010, a business has a new rental agreement with a customer and receives $2,000 for 2 months rent. • May 1, 2010 = Cash Received • May 31, 2010 = Revenue Recorded ($1,000) • June 30, 2010 = Revenue Recorded ($1,000)

  7. Deferred Expense On May 1, 2010, a business pays $3,000 for 3-months of insurance coverage. • May 1, 2010 = Cash Paid • May 31, 2010 = Expense Recorded ($1,000) • June 30, 2010 = Expense Recorded ($1,000) • July 31, 2010 = Expense Recorded ($1,000)

  8. 2/28 Warm-up • Explain why the recording of revenue and expenses can be different from the recording of actual cash flow. • Explain the importance of cash forecasting for a business.

  9. Components of Cash Flow Forecast • Cash Inflows (+) • Operating Cash Flows (Sales/Revenue) • Cash Sales • Payments from Debtors (sales to customers on credit) • Capital (Invested Funds or Borrowing) • Cash Outflows (-) • Capital Expenditures • Revenue Expenditures: Paying bills, costs & expenses • Net Cash Flow • [Cash Inflows] – [Cash Outflows] • Balances • Opening Balance (previous period closing balance) • Closing Balance (Opening Balance + Net Cash Flow)

  10. Obtain Financing Improve Cash Flows Problem Identified Time to implement Tactical Solutions Strategic Solutions Improve Cash Inflows Shorten receivables period Improve or Marketing Improve Cash Outflows Lengthen Payables Period Shorten Inventory Period Reduce Expenses • Obtain short-term sources of liquidity • Overdrafts • Sale & leaseback • Sell fixed assets • Debt factoring • Government assistance

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