The equity method of accounting reflects the economic reality of an investment transaction. By recording changes in the value of the investee business in an investment account the investor recognizes the significant influence it has over the operations of the investee.
The net cash flow in or out for a business for an accounting period must be matched by changes in cash flow funding.
If we use the example cash flow statement below, the top half of the cash flow statement shows the cash flows in and out due to operating. financing and investing activities the final figure (highlighted in green) represents the net cash flow out of the business, in this case £57,000. In order for this to happen, the business must match this cash flow out with additional funding.
A business expects to receive consideration for the sale of goods to its customers. Since accounting periods are for a defined time period a process is needed to allocate the correct amount of consideration to the correct period. This process is referred to as revenue recognition and is applied using a five step revenue model.
Net purchases is equal to the gross purchases of goods from suppliers less the amount of purchase returns, allowances, and discounts. To arrive at the total cost of goods purchased the business needs to add the cost of freight-in needed to deliver the goods to their present location and condition ready for sale to customers.
The cash flow from operating activities for a business can be presented using either the statement of cash flows direct method or alternatively the indirect cash flow statement. The direct method cash flow shows gross cash receipts and payments whereas the indirect method cash flow shows net income and adjusts this for balance sheet movements.
When a business undertakes import trade with overseas suppliers and makes payment in a foreign currency it needs to try and protect itself from fluctuations in the currency exchange rate. One method of achieving this is to buy the foreign currency using a currency forward contract.
Make or buy, sell or process further, keep or drop, accept or reject a special order, and repair or replace are all examples of decisions which can made using the incremental analysis approach. The technique considers only relevant costs when a business needs to make a choice between alternative options.
When a business undertakes export trade with overseas customers and receives payment in a foreign currency it needs to try and protect itself from fluctuations in the exchange rate. One method of achieving this is to sell the foreign currency using a foreign exchange forward contract.