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Financial accounting simplified
- Institution
- University Of South Africa (Unisa)
The complex language of financial accounting has been simplified into very simple and basic english
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COMPREHENSIVE NOTES THAT EXPLAIN THEFUNDAMENTALS OF FINANCIAL ACCOUNTING
RELATED MODULES. IT IS SIMPLIFIED AND IT GIVES
PRACTICAL EXAMPLES AS WELL AS CASE STUDIES
WHICH ARE THERE TO AID YOU IN YOUR
UNDERSTANDING
AUTHOR: MILTON
CONTACTS: +27698866058
WE ALSO PROVIDE PRIVATE TUTORIALS ON
FINANCIAL AND MANAGEMENT ACCOUNTING AT ALL
LEVELS. INTERNAL AND EXTERNAL AUDITING AS WELL
Cash Flow Items vs. Non-Cash Flow Items
Understanding the Concept
A cash flow item represents an actual inflow or outflow of cash.
It directly impacts a company's cash position. On the other hand, a non-cash flow item affects
the company's financial position but does not involve an immediate cash transaction.
Cash Flow Items
Inflows: Cash received from customers for sales, interest earned, proceeds from asset
sales, and new financing.
Outflows: Cash paid to suppliers, employees, for operating expenses, taxes, debt
repayments, and asset purchases.
Non-Cash Flow Items
Depreciation: The allocation of an asset's cost over its useful life, impacting net
income but not cash flow.
, Amortization: Similar to depreciation but for intangible assets.
Accruals: Expenses incurred but not yet paid (e.g., accrued wages) or revenues
earned but not yet received (e.g., accrued interest).
Deferred taxes: The timing difference between when a company pays taxes and
when it reports the tax expense on the income statement.
Gains/losses on asset disposal: While these affect net income, they may not
necessarily result in immediate cash inflows or outflows.
Examples and Case Studies
Case Study: Manufacturing Company
Cash Flow Items: Cash received from customers for product sales, cash paid for raw
materials, wages, and utilities.
Non-Cash Flow Items: Depreciation of machinery, amortization of patents, accrued
interest on loans.
Case Study: Technology Company
Cash Flow Items: Cash received from software sales, cash paid for research and
development, employee salaries, and taxes.
Non-Cash Flow Items: Amortization of software development costs, stock-based
compensation, deferred taxes.
Distinguishing Between Cash and Non-Cash Items
To differentiate between cash and non-cash items, consider the following:
Does the transaction involve an immediate exchange of cash? If yes, it's a cash
flow item.
Does the transaction affect the income statement but not the cash balance? If yes,
it's a non-cash flow item.
Importance of Understanding Cash Flow Items
Understanding the difference between cash and non-cash items is crucial for:
Evaluating a company's liquidity: Cash flow items provide a clear picture of a
company's ability to meet short-term obligations.
Analyzing profitability: While net income is important, cash flow provides insights
into a company's ability to generate cash.
Making investment decisions: Cash flow is a key factor in assessing a company's
investment potential.
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