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Frequently Asked Questions and Answers About Accounting

What are three common financial statements?

There are actually three common financial statements that are crucial for determining the financial position of a company. The first one is the balance sheet. The balance sheet is basically a financial tool which is crucial when a company wants to determine the assets, liabilities and the shareholder equity. Whenever a balance sheet is prepared a company will be in position to tell whether the company is at the right financial track or not. The second among the statements is the income statement. Let’s begin with income. When we talk about income, they are basically all the proceeds accrued as result of the balance between revenues and expenses. When revenues are more than expenses, a company will be in a position where it can accrue normal profits. The vice versa is also true.

The third accounting statement is the cash flow statement. The cash flow statement is used to show how the cash flows from normal operations, investments and funding or other activities or programs of the company.

How do I review the general wellbeing of my business or company and which of the statements do I use?

If you are wondering which statement will be able to tell you’re the financial position of your company or business in general, then worry no more because there is a statement known as the cash King; this is actually the cash flow statement. The cash flow statement can tell you how your company is fairing as it will give you’re an actual picture of what the company is generating and what the company is spending. However, in some instances where the company has other external factors affecting its wellbeing, you will need to use all the three statements in order to gain a deeper review of the current financial health of your company.

Does a positive change or increase in inventory affect the income statement?

In most case, whatever happens with or in the inventories does not have any significant effect on the income statements. This means that if an inventory goes up, the impact or effects will be felt on the balance sheet as well as the cash flow statement. You don’t need to worry about how high an inventory goes because it will never affect your income statement.

What does working capital mean?

A working capital is the result accrued from taking the current assets and subtracting the current liabilities. When calculating working capital value, you must remember that the current assets exclude cash while the current liabilities does not include interest and debts written off. If these two elements are excluded, then you will proceed to finding your working capital by lessening current liabilities from current assets.

Is a negative working capital an issue worth solving in a company setting?

A negative working capital is not actually an issue for some companies or businesses. For instance a company which operates on the basis of taking goods on credit from the suppliers and selling them before paying have nothing to worry about having a negative working capital. In fact, a negative working capital will show you that there are less inventories as well account receivables. When this is the case, then be assured of the fact that your business will be running efficiently. However, in other companies where credit by suppliers is not a tradition, a negative working capital is an issue worth looking into. This is an early sign that the company could soon be facing financial difficulties.

Can a purchase be a capital? When a purchase does qualifies to be a capital rather than a purchase?

Some circumstances will require you to buy a product or goods that will last for more than a year. For example, a company may buy a large scale printing machine which has a life of one and a half years. If the machine will live to complete this specified period, then it will automatically graduate to a capital. This is where we will review it in terms of wear and tear (depreciations).

What is the difference between accounts receivables and deferred revenue?

When a company has provides goods or services, it is entitled to the stated cash but the customers can ask to pay later. This is a service that has been given to a customer but the customer is yet to pay. This is treated as accounts receivable. On the other hand, a deferred revenue is that cash which has come in or paid by the customers but the business or the company is yet to deliver a service or goods to the customer.

When good will does becomes handy?

Good will is a term which is used when a company acquires another company’s business even when there fair value of both tangible and intangible assets are not up to the mark. This is basically buying a company without considering the fair value that has been put in place.