cash flow statement

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.

For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold.

Changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts - the amount by which AR has decreased is then added to net sales. If accounts receivable increase from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash.

An increase in inventory, on the other hand, signals that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales. 

property plant and equipment

A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.

Depending on the nature of a company's business, the total value of PP&E can range from very low to extremely high compared to total assets. International accounting.

Example

A business with a high amounts of PP&E would be a shipping company, because most of its assets would be tied into its fleet of ships and administrative buildings. On the other hand, a management consulting firm would have less PP&E, because a consultant would only need a computer and an office in a building to run its operations.This item is listed separately in most financial statements because PP&E is treated differently in accounting statements. This is because improvements, replacements and betterments can pose accounting issues depending on how the costs are recorded.

Initial Cost

Following expenditures are included in the cost of the asset.

1.         Purchase price (excluding refundable taxed)

2.         Directly attributable cost i.e. cost incurred directly to bring the asset to a location and condition that enable it to be used as intended by the management. Recognition of cost in the asset’s carrying amount must be stop as soon as the asset becomes available for use. Examples of directly attributable cost are given below:

a) Installation and assembly cost

b) Cost of testing that the asset is functioning properly. However if any item is produced from this testing, sale proceeds of this item should be deducted from the cost of testing.

c) Borrowing cost should be recognized in the cost of the asset according to Summary of IAS 23 (Borrowing Cost).. For further details of the treatment of borrowing cost, you can read the Summary of IAS 23 (Borrowing Cost).

1.         The ownership of an asset may come with an obligation to dismantle the asset, remove it and restore the site on which it is located at some stage in the future. These future costs must be estimated and included in the cost of the asset. It is worth noting that the fair value of the future cost is recognized in the carrying amount of the asset according to IAS 16 (Property, Plant and Equipment).

1.         Following costs are not included in the cost of the asset according to IAS 16 (Property, Plant and Equipment).

a) Administration cost

b) Advertising cost

c) Cost of training staff

d) Abnormal wastage

e) Cost of moving the asset to another location Subsequent Cost

Further costs are frequently incurred after the acquisition or construction of the asset. The cost can be categorized as follows:

•           Day to day servicing cost should be expensed out in the period they are incurred.

•           When part of an asset is replaced, cost of new part should be recognized in the carrying amount of the asset while cost of the item which is replaced should be derecognized.

•           Major inspections should be recognized in the carrying amount of the asset. For example, an air craft needs to be tested after every 3 years. This inspection cost should be added in the carrying amount of the air craft and should be depreciated over three years.

Subsequent Measurement

All property, plant and equipment should be depreciated with the exception of land. In certain cases land may have a useful life in which case it must also be depreciated.

Depreciable amount is depreciated over the useful life of the asset using a suitable method of depreciation. Depreciable amount is the cost less residual value. Residual value is expected proceeds on disposal less the expected cost of disposal. Useful life is the period over which the asset is expected to be available for use by the entity. There are many methods of depreciation that can be used but famous are straight line balance method and diminishing balance method. If a company decides that any one of the three factors (residual value, useful life, or method of depreciation) needs to be changed, this must be adjusted according to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). For further details, you can read the Summary of IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). Every item of property, plant and equipment must be tested for impairment annually according to IAS 36 (Impairment of Assets). You can read it in detail in Summary of IAS 36 (Impairment of Assets).

Revaluation

The revaluation model involves revaluing the asset’s carrying amount to its fair value. If an entity uses the revaluation model for a particular asset, it will have to apply the revaluation model to all assets within the class of assets.If an asset is revalued upwards, the incremental amount over the carrying amount shall be recognized as “Revaluation Surplus” in the equity through “Statement of Other Comprehensive Income”. Carrying amount of the asset will also be increased with the same amount. This revaluation surplus will be realized to retained earnings over the remaining useful life of the asset or when the asset is disposed off according to IAS 16 (Property, Plant and Equipment). Depreciation will be charged on new carrying amount onwards.If an asset is revalued downwards, the differential amount of the carrying value and fair value shall be recognized as expense immediately. Depreciation will be charged on new carrying amount onwards.

Deferred Tax

If tax authorities do not treat an item of property, plant and equipment in the same way as IAS 16 (Property, Plant and Equipment) requires it to be treated, IAS 12 (Deferred Tax) comes in to interaction. Further details of treatment of IAS 12 (Deferred Tax) are given in the Summary of IAS 12 (Deferred Tax).

Bank reconciliation statement

Profit credited to our bank account

Payments made on our behalf by the bank, through our standing instructions, that we did not record in our books

Money paid in our account by our customers, dealers, agents, etc. without our knowledge

Un-presented cheques

Un-cleared cheques

The last two reasons arise because we record payments or receipts in our books when we receive / issue a cheque. But the bank records the transaction in our account at the time of actual receipts or payments. These differences are included in the bank reconciliation statement.

The first four items are either adjusted in the bank book or shown in the reconciliation statement, depending upon whether we have closed our books for the period or not. If we have closed our books of accounts, these differences will be presented in the bank reconciliation statement. If our books of accounts are not closed as yet, we will adjust our bank book and give effect of all these adjustments in the bank book.

The main idea behind bank reconciliation is that we adjust our bank book for the transactions, that remain untraced, either through a Voucher (charges, profit, standing instruction) or through a Reconciliation Statement (un-presented, un-credited cheques).

From the following particulars, prepare Bank reconciliation statement of Mr. Naveed as on June 30, 2002.

· Balance as per bank book Dr. 32,000

· Cheques deposited but not yet collected by bank 20,200

· Cheques issued but not yet paid by bank 13,000

· Dividend credited by bank on June 30, but the intimation was received later 2,000

· Interest credited by bank 250

· Bank charges debited by bank 50

It is assumed that books of accounts are not closed yet.

Solution   

As books of accounts are not closed, we will find out the adjusted balance first:   

Rs.   

Balance as per bank book Dr. 32,000   

Add/Debit Dividend credited by bank Dr. 2,000   

Add/Debit Interest credited by bank Dr. 250   

Less/Credit Bank charges Cr. (50)   

Adjusted balance as per bank book Dr. 34,200  

INVENTORY

A company's inventory is all of its merchandise intended for sale to its customers in the normal course of business. Inventories are considered current assets in that they usually are sold within a year or within a company's operating cycle. Proper inventory accounting enables companies to represent their net income accurately. These are the types of inventories
·         Raw material
·         Work-in-process
·         Finished goods

Cost of goods sold

A starting point for inventory accounting is determining the cost of merchandise that has been sold within a given accounting period, which is referred to as the "cost of goods sold." The cost of goods sold is the net acquisition cost of merchandise obtained and sold to customers during an operating period and is calculated by adding the value of the beginning inventory, the cost of new inventory items, and transportation costs, and then by subtracting the ending inventory amount
Example

Beginning Inventory$20,000
Add Net Cost of Purchases$62,000
Add Transportation1,00063,000$83,000
Less:Ending Inventory18,000
Cost of Goods Sold$65,000

Methods to determine the value of inventory
LIFO METHOD.
Under LIFO, it is assumed that the most recent purchase is always sold first. Therefore, the inventory that remains is always the oldest inventory

FIFO METHOD.


Under FIFO, it is assumed that the oldest inventory—i.e., the inventory first purchased—is always sold first. Therefore, the inventory that remains is from the most recent purchases.

WEIGHTED AVERAGE METHOD.

Under the Weighted Average Method, a company would determine the weighted average cost of the inventory.

Effects of these methods
LIFO
LIFO Method is preferred by many companies because it has the effect of reducing a company's taxes, thus increasing cash flow. it gives net profit low and cost of goods sold higher.

FIFO
LIFO Method is preferred by many companies because it has the effect of increasing a company's taxes, thus decreasing cash flow. it gives net profit high and cost of goods sold low.
AVERAGE COST
It has normal effect on assets and income.
EXAMPLE
Differences in Gross Profit on Sales
for Each Pricing Method
Specific Identification
Avg.
FIFO
LIFO
Sales250/$15
$3,750
$3,750
$3,750
$3,750
Beginning Inventory 500 500
500
500
500
500
Purchases 3,150 3,150
3,150
3,150
3,150
3,150
Goods for Sale*
3,650 3,650
3,650
3,650
3,650
Ending Inv. 837.50 840
837.50
840
860
820
Cost of Goods 2,812.50 2,810
2,812.50
2,810
2,790
2,830
Gross Profit
$ 937.50
$ 940
$ 960
$ 920
* Goods available for sale include the beginning inventory aswell as additional purchases within the accounting period.

Accounting Cycle Summary

The main and basic objective of accounting in any organization is to collect financial information and to prepare financial statements.To meet these primary objectives through the above mentioned process, it needs a certain cycle which is known as accounting cycle.First step is to collect and analyze the data from transactions then  journalize those transactions into a proper journal.After the general journal entries which is also called book of original entry, adjusting entries are then made from the transactions.After journalizing the data, post those entries(general journal and adjusting) to the ledgers and every account have their own ledger. All transactions for the same account are collected and summarized in one account. After making ledgers, close the accounts by making closing entries of:

1. Revenue Account, 
2. Expenses Account, 
3. Retained Earnings and 
4. Income Summary Account

After journalizing the closing entries, Income Summary Account ledger is made. Then After Closing Trial Balance is made according to the adjusted entries and closing entries, which can also be called as Balance Sheet. Income Statement and Statement of Retained Earnings is made after the trial balance.