Understanding Business Accounting For Dummies, 2nd Edition by Colin Barrow, John A. Tracy Read Free Book Online

cash flow; you can't do one and ignore the other. Business is a two-headed dragon in this respect. Ignoring cash flow can pull the rug out from under a successful profit formula. Still, some managers become preoccupied with making profit and overlook cash flow.
For financial reporting, cash flows are divided into three basic categories:
Basic Format of the Cash Flow Statement
(1) Cash flow from the profit-making activities, or operating activities, for the period ( Note: Operating means the profit-making transactions of the business.)
     
(2) Cash inflows and outflows from investing activities for the period
     
(3) Cash inflows and outflows from the financing activities for the period
     
You determine the bottom-line net increase (or decrease) in cash during the period by adding the three types of cash flows shown in the preceding list.
Part 1 explains why net cash flow from sales revenue and expenses - the business's profit-making operating activities - is more or less than the amount of profit reported in the profit and loss account. The actual cash inflows from revenues and outflows for expenses run on a different timetable than the sales revenue and expenses which are recorded for determining profit. It's like two different trains going to the same destination - the second train (the cash flow train) runs on a later schedule than the first train (the recording of sales revenue and expenses in the accounts of the business). Chapter 7 explains the cash flow analysis of profit as well as the other sources of cash and the uses of cash.
Part 2 of the cash flow statement sums up the major long-term investments made by the business during the year, such as constructing a new production plant or replacing machinery and equipment. If the business sold any of its long-term assets, it reports the cash inflows from these divestments in this section of the cash flow statement.
Part 3 sums up the financing activities of the business during the period - borrowing new money from lenders and raising new capital investment in the business from its owners. Cash outflows to pay off debt are reported in this section, as well as cash distributions from profit paid to the owners of the business.
The cash flow statement reports the net increase or net decrease in cash during the year (or other time period), caused by the three types of cash flows. This increase or decrease in cash during the year is never referred to as the bottom line. This important term is strictly limited to the last line of the profit and loss account, which reflects net income - the final profit after all expenses are deducted.
Imagine you have a highlighter pen in your hand, and the three basic financial statements of a business are in front of you. What are the most important numbers to mark? Financial statements do not have any numbers highlighted; they do not come with headlines like newspapers. You have to find your own headlines. Bottom-line profit in the profit and loss account is one number you would mark for sure. Another key number is cash flow from operating activities in the cash flow statement, or some variation of this number. Cash flow has become very important these days. Chapter 7 explains why this internal source of cash is so important and the various definitions of cash flow (did you think there was only one meaning of this term?).
    Accounting as a Career
In our highly developed economy, many people make their living as accountants - and here we're using the term accountant in the broadest possible sense. Despite the introduction of new technology, the number of people employed in accountancy as a profession has shown extensive growth in the past three decades. Accountants work in many areas of business and the public sector in roles ranging from sole practitioner to chief executive of a multinational company. In public practice firms, from small high street to large international practices, accountants provide professional services to a wide range of