· · Re WEEK ONE - DISCUSSION QUESTION # 2posted by DONALD DEN.docx

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· Re: WEEK ONE - DISCUSSION QUESTION # 2
posted by DONALD DENNIS
Aug 19, 2014, 8:31 AM
Financial statements are crucial documents with details of what
the company earns, how they earn, as well as what and how the
company spends its money.
The income statement shows figures of profitability of that
given company over a period of time. The statements usually
include detailed sections of revenue, gains in addition to their
expenses and losses. If revenue and gains are greater than
expenses and losses, the income statement will show a profit for
the company
The balance sheet provides information about the company's
financial situation over a period of time. This information is
used to make certain business decisions for future projects,
plans or general business operations. The balance sheet includes
more information than that of the income statement. This
information included the company's assets, liabilities, in
addition to the stockholders' equity (their investment). The
assets should always equal liabilities, plus the stockholders
investment(s).
· Comment on Aug 19, 2014, 6:52 PM
Re: WEEK ONE - DISCUSSION QUESTION # 2
posted by Linda Moore
Aug 19, 2014, 6:52 PM
Good! The income statement tells us what we've earned, our
sales and expenses, and in the balance sheet we see our assets
and liabilities, and owner's equity. The equity will also

increase if we have net income and other investments from our
owners. Our income statement tells us a lot especially when we
compare months over time - we can see trends of expenses and
revenues; and analyze what has changed.
Class: Any questions?
· Comment on Aug 20, 2014, 9:13 AM
2 Other Statements
Aug 20, 2014, 9:13 AM
Other than the income and balance sheets, there are two other
documents that are just as important. More about these will be
mentioned in this week and class.
Owners equity statement - This shows and explains changes in
the retained earnings. Retained earnings are on the balance
sheet and will change due to incomes or dividends.
Cash flow statement - A company could be successful, yet lack
cash to pay its bills. This will show sources of cash and where
cash is being used.
Re: 2 Other Statements
posted by Mark Pollack
Aug 20, 2014, 11:36 AM
Donald,
You bring up a great point about the cash flow statement. I was
a small business owner in a retail strip center. I cant tell you
how many conversations I had with fellow business owners that
were struggling to pay there bills; however they showed a
profit. The company used the money in various ways other than
appropriately such as product that did not sell, decorations,
"write-offs" for their home. I do believe that many small

businesses fail because they are underfunded and do not use
simple accounting principles to determine its health.
Mark
Aug 21, 2014, 10:09 AM
I currently work for a small business. 2 owners, and 2
employees. The owners live off the business account, so nothing
is separate. Years ago it wasn't like that, but times got tough
and the additional money flows dried up. When your business
check account is directly tied to your personal spending and
bills, some things will suffer.
Aug 23, 2014, 10:04 PM
Donald - that's true; when times get tough, this is the tendency.
However, you are technically "stealing" from your business and
this just drains the business of its cash. Eventually, the
business suffers because it cannot replenish inventory, make
repairs, add to fixed assets, etc. It is always advisable to keep
business and personal assets separate.
Aug 24, 2014, 4:20 PM
Hi Linda and Donald,
We had a good friend who lost his business by using funds.
Times were not tough, actually money was quickly flowing in to
the organization. However, the company bought his cars, his

boat, his "business" trips and as you can see...when the business
needed capital it wasn't available. I am unsure how you can
"legally" account for these things; however, I am aware of
companies doing it.
Aug 22, 2014, 11:08 PM
Mark - that is so true! When I first moved to Florida, the area
was near Daytona. There were several small businesses opening
up, but the new business owners were not careful; they had cash
and would think they were doing fine, and would take the cash
out and use it for personal things as you mentioned. The one
thing that people do wrong is to forget to reinvest the cash back
into the business. Also, Sales or profits on paper does not
necessarily mean you have cash! Extending credit to the wrong
people is also a common mistake, and your example of
purchasing too much product that does not sell. You don't want
to find yourself with a warehouse full of outdated products!
Aug 23, 2014, 8:33 AM
I can see how this could be a problem when working with
individuals and business in regards to an "on account" basis. I
see this a lot in the service industry I work in and have worked
in with numerous companies. However with the company I work
for now, more times than not we only allow this to happen with
long time clients or friends. However, because we are a
struggling business, the owners may overlook some of the
basics of doing business to draw in business and make us a
convenience to our customers, our company tends to have too
much money floating out there.

posted by SARA HOMSI
Aug 23, 2014, 12:59 PM
Hi Donald,
You bring up a valid point. However, the text talked about
creditors using these types of financial statements in order to
determine the likeliness that an organization could pay back it's
debts and also to examine the past performance of the
organization. This is no new theory to me/us as we can apply it
to our personal lives. Before a bank is going to lend you money
for a new car or mortgage, they are going to run a credit check
on you, look at your income, etc. A history of late payments or
something like bankruptcy may make it harder for one to get the
loan. Or, it may result in having to pay a higher interest rate. At
the end of the day, looking at a person or organization's past
financial situation will help lenders make a better decision.
Sara
Aug 23, 2014, 10:18 PM
Donald - this can become a problem, but at the same time, you
want to attract customers. We especially want to offer more
easy terms, in order for clients/customers to prefer to do
business with us. This is fine, unless these same customers
won't pay their bills! We can become in trouble if we find
ourselves with a lot of uncollectible receivables. It is always a
balancing act, to attract business, and to also be somewhat
cautious when extending credit.
Aug 22, 2014, 1:29 AM

Donald - yes, definitely! The Owner's Equity is important,
because we want to see the accumulation of what net income we
have retained over the life of our business. Also, we can see if
the owners have added or taken out any withdrawals from the
company as well.
The Cash Flow is very important, because we want to see what
cash has been spent, and where the cash inflows have come
from. This is vital for the survival of the business; Sales
themselves don't necessarily mean cash, and of course, we can
find out we are spending more than we make!
Good Post~!
posted by ANDREW WAREING
Aug 21, 2014, 6:20 AM
From what I understand there is significant latitude in
interpretation of the Generally Accepted Accounting Principles
(GAAP) as defined by the FASB. Can this lead to intentional
and unintentional misrepresentation of an organizations health
on the financial statement?
Most executives will have their compensation directly tied to
the financial performance of the company and the auditors are
also compensated by the companies that they audit.
Perhaps I am too cynical but it would seem that despite the best
efforts of the SEC, investors still need to be cautious in basing
investment strategies on financial statements alone.
posted by KEITH MAJORS
Aug 21, 2014, 6:32 PM

Andrew,
I agree with you in that investors should do more research on
companies other than only viewing their financial statements
before coming up with their plan to invest in the company. I
would like to believe that many investors are well educated and
have an understanding of the business world. I have learned in
previous courses that businesses follow a business cycle and
that cycle typically leads to a recession. The recession is
followed by growth and the company will peak out again, and
then start to have a bit of a recession.
This type of business cycle may better describe the economy as
a whole, but my point is this. Investors can look at financial
statements for many months or even years. They can look at
balance sheets and all of the other financial statements to gain a
better understanding of how the business operates and the
investor will be able to pin point where the company is at in
their business cycle. This will help them base their investment
strategies on more than just the financial statements alone.
There is more research involved.
At the end of the day, purchasing stocks in a company has a risk
factor involved, the spectrum or risk is very large.
Aug 22, 2014, 11:21 PM
Keith - that is so true; and we can research as much as possible
but still have unknowns in regard to economic changes or other
unknowns. Weather can change things, and for example,
disasters such as the gulf oil leak creates issues no one could
have foreseen.
Class: what other examples of unforeseen occurrences can you

think of?
Unforeseen occurrences
Aug 23, 2014, 8:56 AM
In regards to the unforeseen occurrences that could happen at
any time, you mentioned the oil spill, or spills that have
happened a few times over the years.
As for a couple local geography based occurrences, my
examples are as followed...
#1 I grew up in Illinois, so for one there are a lot of tornadoes
and vicious winters.
#2 I am in Arizona now so flash flooding and fires are common.
In addition to these, theft is a lot higher here than in Illinois
(mainly vehicles)
Aug 23, 2014, 1:09 PM
Last summer, the small beach town that I live in was hit with a
hurricane that wiped out our beaches and many of the
businesses that reside there. Many of the "ma and pa" shops that
were down there couldn't recover from the hurricane.
In addition to natural disasters, an unforeseen occurance can
include unemployment and recessions. Having just completed an
economics class prior to this one, we talked heavily on the 4
phases of the business cycle and how things have to fluctuate
quite a bit. One the business cycles, a recession, is a period of
large unemployment and inflation. In these types of tough
times, consumption is likely to decrease which often trickles
down to a decrease in sales/revenues for businesses. This can be

considered an unforeseen occurance as it makes it difficult for
organizations to pay back debt.
posted by JASON YORGENSEN
Aug 24, 2014, 6:16 PM
Class,
This year I noticed the effect that weather can have on a
business. It can make a huge impact because it can deter
customers from coming into the business. The other unexpected
changes can happen when congress is involved. I know that
after the bank bailout and mortgage issues regulations were
changed that hindered how banks make money. This brought up
the questions about how banks are not out for anyone but
themselves and harmed the business. When laws are changed it
can change the way people and businesses can make money.
Jason Yorgensen
Aug 24, 2014, 7:28 PM
In the area I live in there are multiple unforeseen circumstances.
I live in the middle of Washington State where we have all
weather conditions present throughout the seasons of the year.
During the winter we may have such a harsh winter that
businesses in town will not receive their shipments of supplies
to be able to sell their customers. This impacts restaurants, bars,
boutiques, and even the university. If we do not have enough
snow in the winter and rain in the spring, the farmers will be
affected. There will not be enough rainfall to fill the reservoir
in the county that supply the irrigation for all of the farming.

Aug 22, 2014, 1:37 AM
Andrew - very important comments indeed! I also wonder
where the line is drawn, because we as a company pay our own
auditors; and that always seemed a conflict in the first place.
The main issue also is the way commissions and calculations are
based. The sales people, and management, are very motivated
to "overstate" earnings, because their compensation is based on
these earnings levels.
Class: What is your opinion on this Post?
Aug 22, 2014, 5:33 PM
Class,
I think that auditors should always be indepandant of the
company. I believe there should be people in the company that
routinely check things to make sure they are in compliance.
This is a necessary evil of owning the company making sure
everything and everyone is doing the correct thing. Although I
think that every company should be routinely audited to ensure
that there is an unbiased view of the business. This can show
other businesses that they are doing things the right way
because they are willing to have someone externally look at the
company. It also adds credibility to the business when they use
those numbers to help talk about the business.
Jason Yorgensen
Aug 22, 2014, 11:23 PM

Jason - I agree! If the business is doing things right, then they
should have no problem opening up to an unbiased outside
auditor. Then, the users of the statements will have no problem
in trusting them. Their confidence level will increase
dramatically.
Aug 24, 2014, 7:41 PM
Jason,
I agree that it is a great tool to use external auditors! Having
internal checks and balances is also another great tool that can
be utilized to reduce the frequency of using external auditors.
Some large companies hire auditors to come in an check their
books for the reasons you've provided. Some companies may not
be large enough to be able to afford to hire a third party
company, so the checks and balances will help.
I know a few small business owners that perform their own
accounting and they do not have the funds available to hire third
party companies. So what they do is keep their books on their
own and they have one person in charge of invoicing, another
person in charge of paying wages, and another person in charge
of receiving payments. This helps keep all of the accounting
responsibilities off of one persons plate and helps ensure the
company is not being taken advantage of or being stolen from.
No cooking books!
Aug 23, 2014, 9:04 AM
As an employee I would want to overstate earnings, but as a
company wouldn't you want to understate your earnings, or just
not lie! Can we not take example from many companies who

lie...such as Enron!
To find the current health of the company (for purposes of
investors, employees and so forth), overstating your earnings
will make your business look better. Think about stock trade.
The better the business is doing, the more likely the stock will
be higher. When the stock rises, that is also additional sources
of income made by us investors. If you understate your
earnings, stocks will sell, lowering your company's total worth.
posted by JEREMY ECKLIN
Aug 24, 2014, 9:31 PM
While I agree that the accounting principles and regulatory
commissions overseeing the principles have loose requirements
and the system of checks and balances has the potential for
corruption, the financing system is based on the faithful
representation of financial statements. I am as cynical as the
next person about the loose financial statement principles, but if
every company was an Enron, the system would have crashed
long ago. The system is certainly not perfect, but with the
implementation of the Sarbanes-Oxley Act of 2002, the good
faith representation and relevant information assumption has to
be trusted. Further, while there are incentives for corruption, if
most companies were to unintentionally or intentionally
misrepresent their data on a regular basis, there would be zero
trust in the system and financing would cease. As a result, most
information is probably relatively accurate because if enough
companies do not act in good faith, the system crashes. Last,
while there are incentives to misrepresent the data, for
profitable companies, the potential ramifications of
misrepresenting the financial health of the company is just not
worth the risk if the company is profitable.

Aug 23, 2014, 12:53 PM
When you say "we can see trends of expenses and revenues;
and analyze what has changed," the first thought I had was what
types of events or occurrences can affect a positive change in
expense and revenues.? I realize that there are many things that
can affect such numbers and financial statements but a few that
I popped into my mind within my current organization includes
mergers and acquisitions. My company grows largely by
acquiring other companies. Since our latest acquisition, our
numbers and financial performance has increased significantly.
The acquisition allows the organization to reach an extended
channel of sales, thus increasing sales revenues.
Aug 23, 2014, 10:31 PM
Sara - that is a good example. In your business, we want to
grow our channels of sales. In this way we can hugely increase
our sales levels, and we can also take sales away from our
competitors. We have to be careful not to spend so much on our
investment as to get into trouble, however. Our expenses can
also be reviewed, from month to month. We can see changes,
and when there are increases, we can examine the details to
understand the reasons why. Our efforts can be to reduce costs,
or to increase sales, in order to raise our profit margin.
Class: What else can we do to add to profits?
Aug 24, 2014, 5:56 PM
Other things that an organization can do to add to profits is to

reduce cost. Less cost typically results in higher margins and
better profits. Costs can be cut several ways. In my
organization, we have several new product development projects
at any given time, but we also have cost reduction projects
going on at the same time. Sometimes changing manufacturing
material(s), shipping from different warehouses, slight redesign
of component parts, etc can really bring down cost of a product,
but selling at the same price, you're going to make more on each
product sold. You can also reduce operating expenses by hiring
more efficient workers, automating certain process/practices,
turning lights off when room(s) aren't in use.
Aug 24, 2014, 7:49 PM
Another way a company can increase profits is by increasing the
productivity of its employees. Sometimes there is a cost
associated with increasing the productivity of employees, but,
generally that benefits of a more productive employee out weigh
the costs.
Employees may become more productive through incentive
programs and bonus structures. Employees become more
productive through on the job training. It may cost money to
train employees, but after they've become more productive,
their inputs into the company will generate more profits.
Motivating employees by setting goals will help them be more
productive and will increase profits. Employees who are
striving to reach goals will work harder and will feel rewarded
just by reaching the goal. Others who are not as easily
motivated by reaching goals can be brought on board by using
goals, incentives, and bonuses together.

Aug 20, 2014, 3:41 PM
Class,
A balance sheet will show a number of things about the
business. It shows what assets the business has as well as
liabilities. It will also show a person what the shareholder
equity is at any given day. The assets can include any business
property that is owned, equipment, or cash in the bank. The
liabilities will include any debts that the business has incurred
either to suppliers or for loans.
The income statement will show how much money the company
made. The statement can be used in a monthly, weekly, or
yearly capacity. The statement will have what money was
brought into the company and it subtracts the expenses that the
company had for the time frame.
Each one of these tools can be used in different ways. They can
be used if potentional investors want to purchase or invest in a
business. These two sheets will give insight to how the
company is preforming. If the numbers are consistently in the
red the company may have a hard time finding investors. These
can also be used by banks when the company wants to get a
loan. The bank will look to see if the company can repay the
loan based on what is coming into the business. Also it can
determine the health of the business from the balance sheets.
Jason Yorgensen
Aug 22, 2014, 1:52 AM
Jason - yes and we can look at these statements in comparison
to the time period prior, or over the last year, to see trends.

This is especially useful in the income statement, where we can
compare certain expenses over time. We can review our payroll
expense, or our insurance expense; to see if we have increases;
then can research the reasons why. Also, we can look at sales
revenue, and if this is growing larger, or we are losing
momentum on our sales.
Aug 23, 2014, 11:58 PM
Aug 19, 2014, 8:08 PM
Both are vital tools for businesses to see the financial health of
the company. The income statement is used to detail company
expenses and revenue from services or products. This provides a
business leader, investor, owner or other stakeholder the ability
to see profitability, revenue growth year over year, and analyze
expenses over sales.
A balance sheet is a similar tool but is used to define assets,
liabilities, and external incomes as compared to revenue. This
information gives the stakeholders a clear picture of the net
worth of the organization. I used balance sheet reports in my
business to analyze my companies revenues and assets,
depreciation, as compared to my gross income.
Both tools are used to help key leaders make business decisions
such as: new employees, downsizing, creating/demolishing
departments, and the like.
Aug 22, 2014, 2:00 AM

Mark - The balance sheet is very useful as you've discussed.
We can see our relationship between debts and assets, to know
how healthy the business is, and an estimate of its longevity.
We also want to see what assets we have and how much they
have as accumulated depreciation. If they are all nearly
depreciated, you can plan on the fact that we will have to
replace some assets soon!
Aug 24, 2014, 4:22 PM
Thank you Linda for the reply. A few years ago we had a
meeting with our accountant and we had depreciated a number
of large items such as our X-Ray machine. It was funny to hear
from her that we needed to go buy more equipment for the
hospital we owned for the write offs and depreciation. That does
put businesses in a tough spot potentially. The company was
doing well, however, we were not in a position to spend more
money or more percisely , that amount of money.
Response from Patricia
posted by patricia surber
Aug 19, 2014, 9:08 PM
An income statement is a financial statement that helps
businesses communicate with their users. The income statement
reports revenues and expenses to locate the success or failure of
a business in a certain time frame. The revenues and expenses
are the company's operations. The income statement will
date the ending of the time frame so the business knows the
period of time of the results of the operations. The revenue is
always recorded first on the income statement then the expenses
next. The expenses are deducted from the revenues to determine
the net income or net loss made in that certain period of time.
The company wants to know the net income so they can predict

future net income. Investors will look at the income statement
to determine if they want to buy or sell their stock in that
company. A balance sheet is another financial statement that
helps businesses communicate with their users. Companies use a
balance sheet to report assets and claims of assets such as
creditors (liabilities) and owners (stockholders' equity) claims.
On the balance sheet, the assets must match the claims of assets.
The company uses the balance sheet to determine if they have
the cash on hand to meet their cash needs.
Re: Response from Patricia
Aug 21, 2014, 6:12 PM
Class,
I agree with you that each are vital tools for leaders in a
business. They are tools that will help leaders make key
decisions. These tools are also important tools for investors
and people outside of the company. Investors will use these
tools to decide if the company is a good investment or
something that is on the decline. Investors will also look at
multiple businesses within the same industry to make an
evaluation of the industry as a whole. These statements can
show if its just one particular company struggling or if it is a
complete change in the industry. It is important that businesses
and leaders keep accurate records so everyone can understand
how the business is operating.
Jason Yorgensen
Aug 23, 2014, 7:49 AM
I agree that these financial statements are vital tools. The
balance sheet is also called the statement of financial position.

The balance sheet lists what a company owns and what it owes
to determine the company's financial standing. The income
statement is also called the profit and loss statement which
provides information about a company's profitability during a
certain time frame. The purpose of these documents is to give
decision makers the ability to look at the current situation of the
company and make changes if needed. Creditors look at these
documents to determine if they will loan this company money or
not. Stock investors will look at these statements to determine if
this company is a good investment or not.
Aug 22, 2014, 2:26 AM
Patricia - we want to prepare our income statement to show the
most important details of our business. For example, if we are a
sales or telemarketing company, telephone expense may be more
detailed than in another business; and advertising will also be a
key expense item to be looked at. Outside investors or lenders
will want to see the statements to make their judgment as to
what to do. Our stockholders will want to decide also if they
have a good investment, or want to sell their stock. Of course
the IRS will be interested in our income information as well!
Aug 23, 2014, 7:36 AM
Great point. I work for a telemarketing firm. We are contracted
by DirecTV to call their customers for them. We have many
employees who work about 37.5 hours a week. Within that time
they are making a lot of calls. We are open Sunday through
Saturday. Saturday and Sunday we are open 7am to 3pm.
Monday through Friday we are open until 10am to 6pm. The
income statement would show the amount of calls that were

made during a certain time frame. The income statement would
have the amount of time for each call in seconds, minutes, and
hours. I am very interested to see what the income statement
would look like. I wonder what other detailed would be on the
income statement.
Aug 23, 2014, 10:38 PM
Patricia - what we see in our balance sheet is all of our assets,
our liabilities and owner's equity. We can see where our assets
have come from; owner's investing capital, or from accounts
payable. Those looking at the data can then tell if the business
is healthy or not. If too much is made up of debt, it is not good
for the business.
Aug 24, 2014, 5:43 PM
Thank you. Assets are things that a business owns. The assets
are resources of a business owns through transactions with
economic value in the form of cash. The assets can be costs that
have been paid advance such as advertising, insurance, legal
fees, and rent. Asset accounts are reported on the balance sheet
such as cash on hand, investments, accounts receivable,
inventory, supplies, land, buildings, equipment, goodwill, and
bond issue costs. The liabilities listed on the balance sheet are
obligations of a business. The liabilities are the amounts owed
to creditors and are the source of the company's assets.
Liabilities also are amounts of future services that have been
received in advance but not paid for yet. Most of the liability
accounts have the word "payable" in it such as wages payable,
salaries payable, accounts payable, and interest payable. The
owner's equity is also a source of a business assets. On the

balance sheet the assets minus the liabilities equals the owner's
equity. The examples of owner's equity would be common
stock, preferred stock, and retained earnings; just to mention a
few.
Aug 20, 2014, 5:45 AM
Balance sheets and income statements are financial statements
that allow organizations to get an understanding of the health of
the company. A balance sheet shows the company's assets and
liabilities at any given moment in time. An income statement
shows the financial state of the company over a given reporting
period. Balance sheets and income statements are used by the
company itself to guide good business decisions but are also
used by investors and banks to track investment risk and
opportunities.
Myers, C. (2014). The Purpose of a Balance Sheet and Income
Statement. Retrieved from
http://yourbusiness.azcentral.com/purpose-balance-sheet-
income-statement-3520.html
Aug 22, 2014, 11:30 PM
Andrew - The banking industry has to be able to review a
company to know if they can loan them money, if they will be
able to collect the payments.. Investors want to know if their
money will bring them good returns. Is the risk worth it?
These are the questions we want to be able to answer when
reading the financial statements.

Anna DQ2
posted by ANNA WEBB
Aug 21, 2014, 12:48 PM
Balance sheets are financial statements detailing the
relationship between business assets (cash, receivables,
inventory, supplies, etc.) and liabilities (payables) on a specific
date, whereas an income statement lists revenues and expenses
for a certain time period, such as a month. Income statements
are valuable because a company can predict future performance
by analyzing past performance.
Aug 21, 2014, 6:15 PM
The purpose of the income statement is to show companies
revenues and expenses. The income statement will compare the
revenues generated and the expenses paid out to show if a
company is operating in a way that is providing a new income
or a net loss. If the revenue is greater than expenses then a
company is operating in a way that generates net income. If
expenses are greater than revenue then a company is operating
in a way that generates a net loss.
The income statement is a statement that current investors and
potential investors will study to determine what they would like
to do with the corporations stocks. The income statements of a
company can provide insight to investors as to how the company
is operating. An investor may not want to purchase stocks in a
company if they have a history of operating at a net loss. If the
companies net income statements show a trend of operating at a
net income, the investor may feel more inclined to purchase
stock in that company.

Aug 21, 2014, 6:23 PM
The purpose of the balance sheet is to show what a company has
as assets and what a company holds as liabilities and as
stockholder's equity. The balance sheet should always follow
the basic accounting equation of Assets = Liabilities +
Stockholder's Equity. The balance sheet can show a companies
position at a specific point in time.
The balance sheet is what loan institutions will look at when a
company is attempting to gain financing for improving or
expanding their business. Loan agents or creditors will be able
to analyze the balance sheet and determine the companies'
ability to pay of their debts. Creditors compare the assets,
liabilities, and stockholder's equity, which is presented in the
balance sheet, to make their decisions.
Aug 22, 2014, 2:36 AM
Keith - looking at the balance sheet tells us where we stand at
one particular point in time; the "balances" of our assets
liabilities and owner's equity. Each of these balances are an
accumulation of what we've done so far in our business, no
matter how old of a business we have! For example, our assets,
our cash balance, our accounts payable.
Class: What else would a balance sheet be useful for?
Aug 22, 2014, 6:37 AM
Balance sheets are useful to potential investors and regulatory

agencies in ascertaining the financial health of an organization.
These external agencies are limited to the public data that
companies have to publish and the balance sheet allows them to
make solid investment decisions. They also provide data for the
management teams to apply analytical tools to identify trends
and relationships based on current and historical data.
Aug 22, 2014, 5:36 PM
Class,
Balance sheets can also be useful to show what areas of the
business are strong and what need improvement. Specifically
looking at assets of the business. If the business has a lot of
income but not a lot of assets this could help leadership
understand what they need to purchase. Also it can do the
opposite if lower level managers are spending a lot in expenses
it can help find places to cut. Balance sheets are something that
are vital to help leaders understand how there business runs
daily.
Jason Yorgensen
Aug 24, 2014, 9:19 PM
A balance sheet is useful to evaluate the various aspects of a
company. For example, since assets are listed under major
categories, an internal user can better understand where the
value of the company is located. Further, looking at the assets
section can show how assets are balanced, whether the company
has a high cash amount, or a high accounts receivable amount.
If a company regularly operates with low cash amounts and high
accounts receivable, one might be concerned about the

company's ability to manage operations because of high
receivables not correlating into cash in a timely manner.
Another useful section is the liability and stockholder's equity
section. Evaluating the liabilities of a company compared to
their assets helps determine profitability. Further, the amount
of stockholder's equity in a company would interest potential
stockholders. Last, the kind of debt, whether short term or long
term generated and owed by the company would interest
investors. The balance sheet contains a great deal of useful
information to potential investors and internal managers about
the overall financial health of the company.
Aug 23, 2014, 12:48 PM
According to this week's readings...
The purpose of the income statement is to show how
successfully (or unsuccessfully) your business performed during
a period of time by reporting your revenues and expenses. Net
income or net loss is reported on these statements by
subtracting your total expenses from your revenue. A positive
result means you have a net income. A negative result means
you have a net loss.
The purpose of the balance sheet is to present a picture at a
point in time of what your business owns (its assets) and what it
owes (its liabilities). Assets include cash and accounts
receivables. Liabilities are items such as accounts payable and
salaries payable. Stockholder's equity includes common stock
and retained earnings. You're assets should always equal your
liabilities and stockholder's equity.

posted by JOHN RUIZ
Aug 23, 2014, 10:02 PM
Financial statements such as income statements and balance
sheets are two of the ways companies keep track of their
operations. Each statement serves a very specific purpose as
they report the financial status of two different aspects of the
company's operations. The first is a company's income
statement where the focus is on reporting all revenues,
products/services sold, and expenses. The result of an income
statement is the identification of both the gross and net profits
after the calculations are made from the list of determined
expenditures. The resulting calculation of an income statement
allows companies to track their earned profits and understand
the costs of their operations.
A balance sheet differs from income statements as it reports
equities, liabilities, and assets. This is important as it allows a
company to track all of the company's assets such as properties
owned and contracts, the liabilities a company has such as the
operational costs and the equity as the investments that exist
within a company. As income statements report profits, balance
sheets report a company's total liabilities, total assets, and a
company's net wealth. These figures are often represented as a
company's economic value.
Aug 23, 2014, 10:43 PM
The income statement is important to internal and external users
because it demonstrates the results of operations during a given
period of time. This period of time usually consists of one
month, or a quarter of a year, or a full year but sometimes it is
longer if the production cycle of a business is longer than one
year. The income statement is used to show the revenue
generated minus the expenses during a specific period of time.

This information is useful to end users because it demonstrates
profitability over periods of time in operation. If revenue
exceeds expenses, the company has made a profit. If expenses
exceed revenue, the business has a loss during that period of
time. Investors use this information to predict future
profitability of companies when considering investment
opportunities.
The balance sheet compares assets to liabilities and
stockholders' equity at a specific point in time. This is usually
reported at the end of a month, quarter, or year. Assets consist
of anything that can be declared for a cash value belonging to
the company. Specifically this includes cash, accounts
receivable, supplies on hand, equipment, and prepaid
insurance. Liabilities refer to any debt incurred by the company
in obtaining financing from creditors, investors, or vendors.
Liabilities include notes, accounts, salaries, and interest
payable. Stockholders' equity consists of investment from the
sale of common stocks to stockholders combined with retained
earnings of business operations. The balance sheet is used by
creditors to evaluate the likelihood of repayment of investment.
It can also be used to evaluate whether companies have
sufficient cash on hand to meet immediate liabilities. Both
statements are used by potential investors and creditors to
attempt to garnish information about the potential success of a
business and investments with the company.
WEEK ONE - DISCUSSION QUESTION # 2
posted by KATIE LE
Aug 23, 2014, 11:10 PM
Purpose of Income Statement:
Also called the profit and loss statement, or income and expense
statement, this document provides a snapshot of the company's
profitability during a specific period. An income statement
includes a note that says something similar to: "For the period

covering January 1 through January 31, 2013." Periods for
reporting the financials are company directed and could differ
from company to company. One section of the income statement
is dedicated to the income and revenue summarized into a sub-
total for the period. The other half of the statement reflects the
expenses for the same period. The difference between the two
numbers determines whether the company was profitable or not
during the stated period. If expenses were higher than income,
the company experienced a loss during that business cycle
(Media, 2014).
Purpose of Balance Sheet:
Another name for the balance sheet is the statement of financial
position. Creditors and interested stock investors use the
balance sheet to determine a company's financial standing
because it lists what a company owns and what it owes. The
balance sheet contains summarized information on a company's
assets, the things that it owns and its liabilities, the debts it has.
When you subtract the company's liabilities from the assets,
what is left is called stockholder's equity, the amount that is
held by the company's owners or stockholders (Media, 2014).
References:
Media, D. (2014). The Purpose of a Balance Sheet & Income
Statement | Chron.com. Retrieved from
http://smallbusiness.chron.com/purpose-balance-sheet-income-
statement-61847.html
posted by Robert Peck
Aug 23, 2014, 11:25 PM
The income statement is a financial form that shows how assets
and liabilities were used during a specific period of time and
how your business performed over a period of time. An income
statement provides a summary of all revenue created and all
expenses (by category) incurred by your business. An income
statement displays what goods or services were sold which

resulted in revenue for the company. Income statements also
show earnings or profits of the business.
A balance sheet is a financial form that shows a shot of your
business a specific period of time. A balance sheet will always
display Assets, Liabilities, and Owner's Equity. A balance
sheet identifies current and long term assets and liabilities.
Balance sheets usually contain more than one year of financial
information on them, which helps businesses and
consumers identify trends or changes during a specific time
frame.
posted by KRISTIAN OGLETREE
Aug 24, 2014, 7:37 PM
DQ # 2: DISCUSS THE PURPOSE OF THE INCOME
STATEMENT & BALANCE SHEET.
An income statement is just what the company the made that
period it could be a month, year or a week. You can look at the
statement to see what the company made and how much is being
brought in and what adjustments need to be taken. Where a
balance sheet has everything listed including the expense that
comes along with the company. The balance Sheet is needed
when trying to figure out the big picture for the company and
gives them something to look at for the future.
posted by LOTTIE BAKER
Aug 24, 2014, 9:26 PM
The purpose of an income statement is to show the productivity
of a company for a specific period of time. For example, the
XYZ store wants to know the expense for period ending on
07/31/2014, an income statement would be created to provide
the requested information. The balance sheet shows displays

what a company owns (assets) and what is owes (liabilities)
within in a specific time frame. For example, ABC corporation
is preparing a balance sheet to show total assets, liabilities and
owner equity for month ending in 01/31/2012.
K ONE - DISCUSSION QUESTION # 1
Aug 19, 2014, 12:40 AM
WEEK # 1: Class: Please post your responses to the following
discussion question:
DQ # 1: DISCUSS THE MEANING OF CASH VS. ACCRUAL
ACCOUNTING.
Aug 19, 2014, 8:09 AM
The cash method and the accrual method (or sometimes called
cash basis or accrual basis) are two main methods of keeping
track of a business's income and expenses. Each method will
have their pros and their cons, but it's all about what method
will benefit the business the most. Each method only is different
in terms of timing of each transaction. This includes the sales
and purchases, as well as credit and debits to and from your
accounts.
The cash method is more commonly used, and is more times
than not used for small business. In regards to the cash method,
income is not counted until cash (of some form) is actually
received. Expenses are not counted until they are paid.
The accrual method is used for larger business or corporations.
Transaction are counted when an order is made, item delivered
or service are being worked on. Meaning by this, the income is
counted when the sale occurs. Expenses are counted when you

receive the good or service. Actual money doesn't have to be
seen, and the actual money isn't counted for or against your
checking account to record that transaction.
I have seen this happen from time to time as a buyer. When I
use PayPal or even shop at a particular store, sometimes it takes
a couple days for the actual transaction to post to my account,
although the store has received my order and is in the process of
completing my order even before money is taken out of my
account (the store probably hasn't seen money yet either).
Aug 19, 2014, 6:59 PM
Donald - Good synopsis! The Accrual method is a better
matching method in many instances. We see that sales and
expenses happen and are recorded in the same month; whereas if
we wait for the accounts receivable or payable to happen, that is
cash to change hands, this will result in another month. Small
business has many instances that we see cash transactions that
match regardless. However, in a larger more complex
organization, it is essential to capture matching transactions, to
be able to see the true picture of the profits or losses.
Comments / Questions?
Aug 19, 2014, 8:00 PM
Question: Do companies have to factor nonpayment or slow
payment if they use the accrual method? I would imagine there
are calculated risks by not counting revenue by whats on hand.

Aug 20, 2014, 9:05 PM
Mark - yes, there has to be a way to include those "not paying"
which would be "uncollectible accounts expense". If you have a
lot of sales, you also can set up an "allowance for uncollectible
accounts" as a percentage of sales, for example. We may have
sales or revenue in our organization but we also have to be
careful that we are selling "on account" to those who will
indeed pay us. If our credit is too easy, we may get sales that
won't be collectible.
Good Post! Class: Comments / Questions?
Aug 21, 2014, 5:52 PM
Class,
I agree with this post. Working in a bank I can see how this
will apply. It is interesting when you see a number of
companies that have financing for there product. Those
companies push the fact that they will approve anyone no matter
what the credit. This type of advertising will attract any type of
person. The issue will be there ability to pay the loan or credit
product back. What I think is unique is some of those
companies will use an independent companies to get the
financing through. This is a good business model for the
company because they get paid and the risk moves over to the
loan company.
Jason Yorgensen

Aug 22, 2014, 11:37 PM
Jason - the fact remains that if there are too many of these bad
loans, the loan company or bank will not survive. In our
current economy, we saw this with so many foreclosures, and
we will take a long time to recover. We are starting to see some
improvement, but the banks will be extra cautious for a long
time. In your bank, I am sure you see this happening, and the
business has to make money so the bank has to give out loans.
However, the bank has to keep going, because without loans,
there is no hope of them earning interest revenue.
posted by JOHN RUIZ
Aug 24, 2014, 8:24 AM
This is something that has really hit home for myself as I just
started a new career this month at Mattress Firm and we work
with 3 different financing companies that provide several
different types of interest free financing loans for various
periods. At Mattress Firm we can get a bed financed to anyone,
but it does not mean that you can actually afford the monthly
payment. It really comes down to you knowing your monthly
expenses and if you can afford to pay anywhere between $45 to
$180 a month for a bed for any where between 90 days to 6
years. Most financial lenders will provide the funds, but you
have to really ask yourself if you can afford the payments.
Aug 24, 2014, 9:00 PM
John, your example also hits home with me. I actually regularly
use zero interest financing for various large purchases the last
few years. So far, I have been able to beat the bet if you will
and pay off the debt prior to zero interest incentive expiration.

I do understand the risks associated with this kind of financing.
For example, a few years ago, I was interested in purchasing a
new television and was offered a 36 month zero interest card
with Best Buy to make the purchase. I took the offer and was
able to afford the monthly payment in order to pay off the debt
prior to the interest spike after three years. While I have been
able to take advantage of these offers so far, I can see the risk
involved in these offers especially if someone takes on multiple
lines of credit at the same time. So, as you point out, many
financial lenders will provide funds to potential borrowers, but
the borrower needs to understand the consequences if they are
unable to afford the monthly payments.
posted by SARA MARKEL
Aug 23, 2014, 9:42 PM
I see this in my company with the amount of sales and
merchandise we sell every week due to the pre-billing and the
allotted amount allow to pre bill to company. I see it's with the
grocery trucks because those trucks are delivered everyday and
can be very pertinent to the amount of onhands that are needed
to keep up with the demand of consumables items. Good Post!
Aug 20, 2014, 5:38 AM
The cash method is often used by small businesses. It is based
on the method that income is not counted until the cash is
received and expenses are not counted until they are paid. The
accrual method recognizes transactions when the order is made
regardless of when the money is actually received. The accrual
method must be used if a business has sales of $5 million or
more. It is used by larger businesses as it allows the
organization to obtain greater insights into the flow of revenues

and expenses.
Cash vs. Accrual Accounting. (2014). Retrieved
from http://www.nolo.com/legal-encyclopedia/accounting's-
29513.html
Aug 20, 2014, 11:17 PM
Andrew - good post! In order for a large organization to
understand how they are doing, they must use accrual
accounting. In order to get good and matched numbers, you
have to be able to have the transactions together within the
period that they occur; such as revenues and expenses. This
tells us how much we have made, and what it cost us for those
particular sales levels.
Aug 21, 2014, 6:13 AM
Linda - I read an article that referenced some research from
Criterion Research Group LLC. The research showed that many
companies overestimate the amount of accruals. This can lead to
a misleading representation of the financial health of the
organization. In some worst cases, where companies made
significant errors, class action lawsuits were made by
shareholders. In summary, the study showed that companies that
use more accruals actually underperform companies with fewer
accruals.
I guess there is a balance when calculating accruals that ensures
good accounting practices are adhered to?

Colter, G. (2004). Accrual Accounting Can Be Costly. Retrieved
fromhttp://online.wsj.com/news/articles/SB10887100521685317
8
posted by JOHN RUIZ
Aug 24, 2014, 8:30 AM
It really seems like either method can be used at any level of
company, but even though accrual accounting provides a bigger
picture, it seems to come with a few risks. It seems that in order
for a company to really be able to latch onto the concept of
aggressive expansion, it really does need to use accrual
accounting as the big picture always allows for ore realistic
ideas of what can actually be done and what cannot. Living by
cash accounting alone seems simple enough, but it hinders the
concept of clear images of forecasting as it only track what has
either been received or paid and not what will be.
posted by JOHN RUIZ
Aug 24, 2014, 8:17 AM
When it comes to accounting I am able to see the benefits of
accrual accounting and cash accounting, but also the draw backs
from both systems of accounting. It really seems like a system
of cash accounting for receivables and accrual accounting for
expenditures really would be better than just using one or
another. It is a great idea to know what should be coming your
way, but there are so many times when deals are made,
contracts are signed, and then the cash never comes. Depending
or planning on what is not actually in hand can lead to some
really bad decision making. On the expenditure side however,
you should plan to always pay what is owed and so your budget
really should revolve around you only spending after all
expenditures have been accounted for.

posted by TIFFANY MINGO
Aug 24, 2014, 5:52 PM
Good explanations and points Donald. I definitely see both
methods in everyday or monthly transactions I make. A good
example is something like a food or clothes transaction where
the money is given and taken in account right away. Other
examples are monthly accrual transactions that I have like gym
memberships where you are able to use the facility before the
money is taken from your account. I think both methods are
efficient and are accommodating to us because it is not always
easy or on hand to pay for the product or service.
Aug 19, 2014, 7:21 PM
Every company has an accounting period which is one year long
that is called a fiscal year. That fiscal year does not have to
start at the beginning and end of the calendar year because it
can begin at anytime of the year. Many companies want to end
their fiscal year when they are not busy because gathering the
information for their accounting purposes takes time. Many
companies want to end their fiscal year when their inventory is
low because it is easier to compile accounting data at these
times. Accrual accounting is an assumption that helps develop
accounting standards. The accrual accounting takes place at the
times that events occur so the financial statements are recorded
at these times. These financial statements are compiled through
revenue and expenses. The cash accounting are receipts that are
recorded during the fiscal year in the form of cash that is used
by small businesses because it is easier and they can see what
money they have right away.

Aug 22, 2014, 7:39 AM
Patricia,
This is something my company Wal-Mart does when inventory
Is at it low, The fiscal years starts in Feb. Its funny you say this
because it relates as to why the book inventory is the lowest,
coming out of a major holidays and clearance, the backroom is
not as full, my store runs with about 7 million in inventory at
any given time and it fluctuate throughout the upcoming events
or holidays. I have seen it at 7 million and then a month later
drop to 4 million depending on the warehouses and the events
taking place. Great Post.
Response from Patricia to Sara
Aug 24, 2014, 5:26 PM
Hello Sara:
I know that making calculations when inventory is low would be
much easier than when the whole warehouse is full. I work in
the HR department and financial calculations usually ends when
the project ends. If the project is a continuous yearly affair then
the calculations are done every quarter from the beginning of
the project no matter when the project began in the year. The
calculations are needed no mater how business or slow we are.
So if a company can do calculations when the inventory is
smaller than they are lucky.
Aug 24, 2014, 6:01 PM

I agree, companies have their fiscal year at different times of
the year depending on things such as inventory and when they
want to look at their income statements and balance sheets. I
know certain businesses we deal with have their fiscal years at
the end or first of the new year as the 12 months is the time
period they are looking at before making decisions for the new
year. I always wondered what specific reasons companies had
for their fiscal years at different times and from this chapter I
learned they do not always have a choice as it is based on when
the industry started. Also, I learned that they tend to not pull
their reports when there is "down time" or when things are
requiring work and attention. They want to know when there
numbers are the best and why it works so well that way.
Aug 19, 2014, 7:58 PM
The cash method and the accrual method seem to differ on when
the income is actually earned. For clarity, the cash method only
recognizes the sale once the cash or check has cleared into the
account of the business. This method is typically used in small
businesses. As a former business owner, we used this method to
calculate profitability because we did not have the capital or the
resources to chase debtors.
The accrual method accounts for the income the moment the
order is placed. If we think about large organizations, like Best
Buy, they would possible count the sales the moment the order
was placed online regardless of payment. This process is also
true for any product or services completed. Large organizations
have the financial ability to recognize profits from this point
versus a smaller company.
I owned an animal hospital and we were a cash upfront
organization. Our company did not have deep pockets or credit

departments to chase those who owed us for services rendered.
Aug 22, 2014, 7:43 AM
Mark,
What about emergencies and people who just can't afford to pay
for the emergency care needed for there loved one (Fury
Friends). DO you offer another source such as care credit for
financing. Do you allow for payment over time?
Emergency is something people don't plan for and just saying if
they found this animal hurt and tried to be a good neighbor,
would you offer a discount rate for helping out an injured
animal. Having this type of compassion for the animal instead
of the dollar amount will lead to trust in knowing to take the
injured animal to you and your team and knowing that they can
afford the care will get them to refer you to there friends and
family which in turn will lead to better revenue and profit for
you business I would think, just asking.
Aug 24, 2014, 4:17 PM
Hi Sara,
Great post and question. Yes, we would offer care credit, but we
also had an angel fund. We had a weathy client donate $2,000 to
this fund and ask people if they would like to donate. If a pet
comes in and is in need of a surgery or service, we first really
determine need. We do go through a vetting process to make
sure we are using the money correctly, and then perform the
service.

From an accounting standpoint, we keep the money in a separate
account and the accountant "sees" it only when it is processed
to cover a service. I hope this answers your question.
Aug 20, 2014, 3:56 PM
Class,
The cash and accrual method of accounting are two ways that
businesses can evaluate orders. The cash method is one that is
used for smaller or start up businesses. It will only count and
order or income when it is paid for by the customer. This
means that it will not count things when cash, check,
credit/debit are not used. The benefit for using the method with
smaller businesses is to ensure that they are not counting things
as income and overspending. Especially if it is something
where the customer will change there mind before or after the
order is placed. This can cost the business money in the long
run and possibly impact other customers.
The accrual method happens when transactions or orders are
counted when it is received from the customer. In this form of
accounting it does not matter when the item is paid for it can be
before or after the item is delivered. This can be risky for
businesses because the customer can change there mind at any
moment costing the business money on a product or service.
Also if the customer does not want to pay after the product or
service is preformed it can go into legal ramifications.
Jason Yorgensen
Aug 22, 2014, 3:22 PM

Overall I believe the cash method is used more among
companies because in this circumstance money does not have
value or is not put within the system until it is received. This
goes the same for someone in the accounts payable department
where they do not count something as an expense until it is
paid. On the other hand the accrual method is where when the
sale occurs you consider it paid and that you have the income.
For expenses it is when the service or good is given and you
may have not received payment for it yet.
In the accounting department we majority of the time use the
cash method when taking in checks, but sometimes we have
what is called a work ticket where we go and perform special
work and it is invoiced and enough it may not have been paid
yet we will accrue for it assuming the money will be coming per
the terms of the contract set up.
posted by JOHN RUIZ
Aug 23, 2014, 9:01 PM
As businesses conduct their accounting practices they use one
of the accounting systems of either cash accounting or accrual
accounting. The first form of cash accounting is the simplest
form of accounting as this systems function similarly to
individual checkbook practices. Cash accounting revolves solely
around actual complete cash practices of either money actually
received or of payments completed. Cash accounting does not
track or take into consideration any possible future payments
due to services rendered. It is all about what is actually in or
what is actually out.
Future transactions are taken into consideration through the
system practices of Accrual accounting. In accrual accounting
unlike in cash accounting where you only track what has been
received, you book all forms of revenue as soon as deal or
contract has been made. The same is applied to expenses as they

are accounted for as soon a deal is struck or acceptance has
been made for an obligation to pay. There are both pros and
cons to either system of accounting as cash accounting is very
specific to what is happening at the very moment, but accrual
accounting provides a better concept of what the future possible
holds, but is hard to rely on as promises are not always kept.
Aug 23, 2014, 10:19 PM
Cash accounting involves accounting for and assigning receipts
during periods which they were received and expenses during
periods which they were paid on the financial statements.
Conversely, accrual accounting involves recording receipts and
expenses when they are incurred instead of when they actually
cleared. Accrual accounting is important for most corporations,
especially those who produce products with large and lengthy
production cycles, often of more than one year. For example, if
Boeing received an order to create twenty new 747 Class
Jetliner's, and they used cash accounting, their business would
appear to lose money during the production cycle because the
company would incur high costs due to production without
accounting for any revenue. As a result, Boeing uses accrual
accounting to report their revenue and expenses when they are
incurred in order to demonstrate the true value of their
operations and income potential. While most large corporations
use accrual accounting to most accurately report their earnings
and expenses, small businesses may find cash accounting more
useful in order to better follow cash flows and available cash
for expenses and investment. It is important to understand
which form of accounting was used on financial statements
about a business in order to make accurately informed financing
and investing decisions about a business.

posted by Robert Peck
Aug 23, 2014, 10:50 PM
Cash basis accounting is a method of accounting used when a
payment is received for the trade of goods or services, a deposit
is made, and the revenue is recorded as of the date of the receipt
of funds no matter when the sale was made. When using cash
basis accounting financial statements display revenues and
expenses based on when transactions are entered rather than
when revenues were earned or expenses incurred. For example,
if my company obtains a huge contract for business during the
year but will not get paid until the contract is complete.
However, during the year we incur expenses as they happen. So
in a nut shell one year our expenses may be larger than our
profits due to the contract not being completed until a later date
in the future all the while our expenses are being recorded as
they occur in the calendar year. this method of tracking
expenses and revenue may be simple but it may cause your
organizations finances to appear as a profit or loss.
Accrual basis accounting is a method of accounting used when
revenue is earned; revenue is earned when goods are delivered
or services are performed; and cash is received. All expenses
are recognized during the time the revenue is recognized.
Financial statements match revenues to the expenses incurred in
earning them. This method provides a better picture of
organization or company's current economic situation. For
example, if company A sells 500 widgets to company B for
$10,000 on June 1st and cash is received on June 10th.
Company A's financial records will reflect the revenue from the
sale being recognized on June 1st although the cash is not
received until June 10 this process allows for a clearer picture
of the company's revenue and expenses.

posted by EIMI YAMADA
Aug 23, 2014, 11:33 PM
Cash accounting is generally used by small businesses. In the
cash method, the income is counted towards the business
income once the actual payment is made. Not when the service
is rendered. For instance, if a company provides a service in
March, but is not paid until May, that income would be counted
as May income, and not as March income, even though the
service was completed in March. The income is counted when
it is actually received.
In Accrual income, the income is counted when the service is
rendered or when the transaction occurs. Though the company
many not get the money for a couple months, the income is
counted right away. It is not counted when it is actually
received. This works for many large companies, in order to
properly track transactions as they occur.
The most important thing is that a business sticks with one
method. If both methods are used, it can easily cause tracking
issues for the company. In order to keep payments tracked, the
business needs to decide which method works better for their
system, and stick with that one method in order to properly
track sales, goods, sold, payments, and services rendered.
posted by KATIE LE
Aug 24, 2014, 12:28 PM
Very nice explanation. To me, I believe the cash method is
easier and make more sense when it comes to dealing with the
IRS. The cash method only record when the money is received.
Not so with accrual-basis. If you get a huge purchase order from
a new customer, that would show as income; then the IRS wants
their 30%, 40%, etc., but since the customer hasn’t paid, you
have to pay the taxes from your pocket. This method will not

benefit small businesses.
Aug 24, 2014, 8:51 PM
Eimi, your explanations of the differences were spot on. I
specifically liked how you point out the importance of choosing
a method and sticking with it. It is important for a company to
use one type of accounting throughout all of their financial
reports in order to provide relevant and faithful representation
of the information. So, companies should use the system which
bests fits the model of their company. As a result, small
business, whether partnerships or sole proprietorships, usually
benefit from cash accounting, where large corporations benefit
from accrual accounting. That being said, while consistency is
important within the financial reports, internal users may find
certain uses from evaluating the company's financial position
from both accrual and cash accounting perspectives. I could see
how there may be value in assessing the information and data
from each point of view in order to better understand the ebbs
and flows of costs associated with production and revenue
generated from sales. Do you think there could be some value
for internal users of the financial reports from both
perspectives?
Anna: WEEK ONE - DISCUSSION QUESTION # 1
posted by ANNA WEBB
Aug 24, 2014, 7:44 AM
A company using cash-basis accounting will only document
revenue once the cash is received. Alternatively, the accrual
basis accounting method records both revenue and expenses as
the events occur. Accrual basis accounting is the preferred
method because of its revenue and expense recognition
principles that is not followed when using cash-basis

accounting. A company's true financial performance under cash-
basis will not be accurate because the resulting numbers when
using cash-basis may be misleading.
Re: Anna: WEEK ONE - DISCUSSION QUESTION # 1
Aug 24, 2014, 6:12 PM
Class,
I almost wonder is there is more risk when using a cash based
accounting system. I would like to see what the statistics are for
businesses that do not document everything that was sold in the
company. I know that businesses are always looking to save
money with tax deductions or giving money to charities. I
would imagine with a cash based system they could hide some
of that money that came into the company or not report it. I
would think this would be difficult with any other accounting
system because there are records of people waiting for orders.
Jason Yorgensen
WEEK ONE - DISCUSSION QUESTION # 1
posted by KATIE LE
Aug 24, 2014, 12:21 PM
The main difference between accrual and cash basis accounting
is the timing of when revenue and expenses are recognized. The
cash method is most used by small businesses and for personal
finances. The cash method accounts for revenue only when the
money is received and for expenses only when the money is
paid out. On the other hand, the accrual method accounts for
revenue when it is earned and expenses goods and services
when they are incurred. The revenue is recorded even if cash
has not been recieved or if expenses have been incurred but no
cash has been paid. Accrual accounting is the most common
method used by businesses.

Reference:
http://www.investopedia.com/ask/answers/09/accrual-
accounting.asp
Aug 24, 2014, 5:45 PM
The cash method is the more commonly used method of
accounting in small business. Under the cash method, income is
not counted until cash (or a check) is actually received, and
expenses are not counted until they are actually paid. Under the
accrual method, transactions are counted when the order is
made, the item is delivered, or the services occur, regardless of
when the money for them (receivables) is actually received or
paid. In other words, income is counted when the sale occurs,
and expenses are counted when you receive the goods or
services. You don't have to wait until you see the money, or
actually pay money out of your checking account, to record a
transaction.
http://www.nolo.com/legal-encyclopedia/cash-vs-accrual-
accounting-29513.html
Aug 24, 2014, 8:04 PM
The difference between Cash Accounting and Accrual
Accounting is as follows:
Cash Accounting processes transactions when cash is exchanged
Accrual Accounting processes transactions as orders are placed
or shipped.
The company I work for operates their business on an accrual
basis and this is easy for me to understand when I am paying

invoices. We pay invoices on specific terms, but essentially we
count the money going out as already being paid out when I
process the invoice. From the time I code and submit an invoice
to the time the supplier receives the check and the check passes
through the bank into their account can be more than 30 days.
I operate my personal finances on a Cash basis. I do not
consider myself having funds in my checking account before I
receive my paycheck. I wait until the funds being deposited into
my account pass through the bank before I consider myself
having it.

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