Accounting principles 2
Every business and organization needs some form of accounting principles to run on. They
are the foundations that either makes or breaks a corporation or business. Businesses from the
small corner drugstore to the giant health care organizations work using these accounting
principles every-day, simply by understanding the techniques used we are to understand the
functioning behind them.
Several forms of accounting come up with a result, some of these are cash flow, accrual, and
fund accounting. Their strengths and weaknesses as well as ...view middle of the document...
Next, in the financial accounting world are cash flow statements- by using a financial
statement this can show a company or business’s flow of cash. Any money coming in is called
the cash inflow, then any money going out, of course is called cash outflow. Using this type of
accounting is very important to a business or organization, simply because it allows the company
to see their financial strengths and weaknesses, so they can determine what bills to pay, if they
have enough money to pay their employees, or take on any more debt. Unlike an individual’s
personal checkbook, which shows their credits and debits in front of them, the cash flow system
does not tell a company or business if they have any profits. Furthermore, the payables and
receivables as well as inventory do not work in the cash flow accounting system. There are five
problems that the cash flow method has 1) several differences between the financial institutions
versus any of the commercial and industrial businesses. 2) financial activities, 3) operating
activities, 4) investing activities, and 5) free cash flow. Another thing about cash flow is that it
has three components to show the company’s business activities such as – investing, financing
and operations. Investing- is the cash outflow for the company, business acquisitions, property
and equipment, capital expenditures as well as investment securities, and any payments made for
any mergers. The cash inflow comes from sales of the assets as well as investment securities.
Financing- this part deals with the debt and equity part that a company borrows and pays back
such as payment from dividends, net borrowing and, repayment of debt principle. Operations-
this is the main source of a company’s cash generation that they produce internally
(Investopedia, 2010). This may include sales, delivery and production of a company’s product as
Accounting principles 4
well as collecting any payment. Items included would be advertising, shipping, building,
inventory and the purchase of materials. Other operations of the cash flow would be interest
earned on loans, payments to employees and suppliers, receipts from goods and services, then
items that may be added or subtracted back into the net income would be deferred taxes,
amortization and depreciation.
Finally, we come to fund accounting, which is...