FOUNDATION FOR CASH FLOW

STATEMENT PREPARATION

truongthihanhdung@uel.edu.vn
 Learning Objective
Explain the accrual basis and cash basis
of accounting

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 Accrual-Basis Accounting
Time period (or periodicity) assumption:
Accountants divide the economic life of a business into artificial
time periods.

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 Fiscal and Calendar Years
• Accounting time periods are generally a month, a quarter, or a year.
• Monthly and quarterly time periods are called interim periods.
• Most large companies must prepare both quarterly and annual financial statements.
• Fiscal Year = Accounting time period that is one year in length.
• Calendar Year = January 1 to December 31.
• Sometimes a company’s year-end will vary from year to year, resulting in accounting
periods of either 52 or 53 weeks.

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 Accrual- versus Cash-Basis Accounting
Accrual-Basis Accounting
• Transactions are recorded in the periods in which the events occur.
• Companies recognize revenues when they perform services (rather than
when they receive cash).
• Expenses are recognized when incurred (rather than when paid).
• Accrual-basis accounting is in accordance with IFRS (International financial
reporting standards).

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 Accrual- versus Cash-Basis Accounting
Cash-Basis Accounting
• Revenues are recorded when cash is received.
• Expenses are recorded when cash is paid.
• Cash-basis accounting is not in accordance with IFRS.

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Differences
Accrual basis
Revenues = Revenues incurred
Expenses = Expenses incurred
Net profit = Rev incurred – Exp incurred (
this number is last line in the Income
Statement)
Cash basis
Revenues = Cash receipts
Expenses = Cash payments
Net profit = Cash receipts – Cash payments
= Differences on Cash account (chính là
chênh lệch số dư trên tài khoản Cash) =
mục tiêu cần giải thích của Cash flows stmt
( This number is purpose of/last line in
the Cash flow stmt)

Hiểu: Người hành nghề tận dụng kiến thức cơ bản này để thực hiện phương pháp gián
tiếp trong lúc lập BCLCTT
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 Recognizing Revenues and Expenses

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 Recognizing Revenues and Expenses

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 Recognizing Revenues and Expenses

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Practice 1
A list of concepts is provided below, with descriptions of the
concepts in the next slide.
There are more descriptions provided than concepts. Match the
description to the concept.
1. ______ Cash-basis accounting.
2. ______ Fiscal year.
3. ______ Revenue recognition principle.
4. ______ Expense recognition principle.

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Practice 2
Concordia Painting Ltd. collected £108,000 from customers in 2024. Of the amount
collected, £25,000 was for services performed in 2023. In addition, Concordia performed
services worth £36,000 in 2024, which will not be collected until 2025.
Concordia Painting also paid £72,000 for expenses in 2024. Of the amount paid, £30,000
was for expenses incurred on account in 2023. In addition, Concordia incurred £42,000 of
expenses in 2024, which will not be paid until 2025.
Instructions
(a) Compute 2024 cash-basis net income.
(b) Compute 2024 accrual-basis net income.

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Practice 3
In its first year of operations, Roma Co. earned $45,000 in revenues
and received $37,000 cash from these customers. The company
incurred expenses of $25,500 but had not paid $5,250 of them at
year-end.

The company also prepaid $6,750 cash for costs that will not be
expensed until the next year. Calculate the
first year’s net income under both the cash basis and the accrual
basis of accounting.

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Practice 4

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Accrual basis pros and cons
Advantages
It provides an accurate picture of
overall cash flow for the business.
Investors prefer accrual accounting. A business that
uses accrual accounting is often looked at as more
permanent and established than businesses that use
cash-basis accounting methods.
It's the preferred method for GAAP/IFRS
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Disadvantages
Small companies might lack the staff
needed to manage this method.
In order to remain accurate, accrual
accounting needs frequent reports
generated.
Business may pay taxes on money it hasn't
received.
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