Introduction To Accounting | Assessment

INTRODUCTION TO ACCOUNTING 1
INTRODUCTION TO
ACCOUNTING

INTRODUCTION TO ACCOUNTING 2
Part A:
Part 1:
In the absence of a positive cash flow, the company would not be able to meet its financial
obligations. This would lead to a cash crunch or bankruptcy. The cash flow is the movement
of money into and out of the business. This helps the investors in understanding the cash in
hand of the business for the purposes of investing the same in the future. When the cash flow
of the company is positive, it does not mean that the business is profitable ("Chapter 3 - Cash
flow accounting", 2019).
The following are the key areas:
 The cash flows from operating activities helps the users in understanding the cash in
hand of the company from day to day business operations
 Cash flows from investing activities shows the users the purchase and the sale of
plant, property etc by the company
 Cash flows from financing activities shows the users the inflow and outflow of cash
from the share capital, borrowing etc.
If the sum total of the above is negative, then that would mean adverse thing about the
company ("Cash Flow Accounting | Boundless Accounting", 2019).
Part 2:
The amount of net income is when the company has earned an excess of the revenue over the
expenses that it has incurred for the purposes of earnings that income. Hence, the expenses
incurred should be less than the revenue earned. These revenues and expenses should be
calculated using the accrual basis of accounting in which the revenue and the expenses are
incurred during the same period. Whereas, net cash flow is the sum total of the activities,
inflow and outflow, of all of the 3 activities taken together (Bragg & Bragg, 2019).
The differences between the two is mainly due to the following:
 There are some of the expenses that are accrued for which the payments is yet to be
made. These are included while calculating the net income but is not included while
calculating the cash flows.

INTRODUCTION TO ACCOUNTING 3
 Then there are some expenses that have been paid in advance and are still required to
be incurred, hence, these are included in the statement of cash flows but are not
included in the calculation of the net income.
 Deferred revenues are the ones that are reported and are included while calculating
the net income since these have not been earned yet.
 Sales made on credit are included and are reported in the statement of net income but
these are not included while preparing the statement of cash flows (Vaidya, 2019).
Part B:
The following are the relevant calculations:
a
) Cash Flow Statement for the year ending 31
December 20X1
Cash from Operating Activities
Cash receipts from Customers
7,85,0
00
Commission received
19,0
00
Payments to Suppliers
-
3,73,000
Other Operating Expenses
-
34,000
Advertising expense
-
21,000
Wages Paid
-
80,000
Taxes Paid
-
1,23,000
1,7
3,0
00

INTRODUCTION TO ACCOUNTING 4
Cash from Investing Activities
Interest Received
14,0
00
Purchase of New Building
-
2,80,000
Purchase of Shares
-
26,000
Sale of Shares
1,31,0
00
Sale of Old Building
96,0
00
Investment in Term Deposit
-
20,000
-
85,
00
0
Cash from Financing Activites
Interest Paid
-
35,000
Capital Introduced
35,0
00
Cash Drawings
-
90,000
Loan Taken
10,0
00
Loan Repaid
-
10,000
Mortgage Obtained
65,0
00
Mortgage Repaid -
1,65,000 -
1,9