Cash_Basis_vs_Accrual_Basis_Accounting

Cash Basis vs. Accrual Basis Accounting The companies discussed in this financial statement analysis utilize an accrual basis accounting system, instead of a cash basis accounting system. All of the companies are large businesses and are publicly traded companies; therefore, an accrual accounting system will produce more accurate accounting information because it matches income with the expenses incurred to produce the income. Large companies have to consider many factors like: sales procedures, how many salesman, volume of sales, number of sales, inventory, percentage of operations, etc (Coffee, 2008). The generally accepted accounting principles (GAAP) require any business that maintains an inventory operate on an accrual basis accounting system. The accrual method will include transactions even though the money has not been exchanged and records the sale as complete (Coffee, 2008). A cash basis accounting system would not consider the credit transactions in which the income owed to the company for sales that has not been paid for yet (Petriesan, 2008). This would cause the statement to misrepresent profitability for an accounting period because of the time-lag between the exchange of goods and services (Klinefelter & McCorkle, 2011). The cash basis is simply the reporting of cash credits and debits at a particular time, not considering any credit transactions. This accounting system would be acceptable for small businesses that do not keep any inventory. For instance, a small mechanic shop could operate a cash basis accounting system because it would buy parts and supplies as needed for each particular vehicle, plus the mechanics are paid for how many hours the job is worth and they are not paid until the job is complete. Therefore, a cash basis accounting system would be sufficient because there are no credit transactions. It is basically a checkbook operation dependent on credits and debits in the exchange of cash for services. Conclusion Ratio analysis uses financial and operating data from a company or industry to provide a basis for comparisons. All the ratios measure a particular association that can have an impact on the other ratios. The ratios will also evaluate the overall financial condition, gauge viability, liabilities, and future performance. Trend analysis can be used with these ratios to predict the company’s financial future and help identify problem areas. Depending on the industry, the FASB and IASB can demand specific financial reporting References Coffee, Joe. (2008). Cash Basis vs. Accrual Basis Accounting. Accessed via the World Wide Web February 19, 2011. http://www.helium.com/items/890492-accrual-basis-accounting-vs-cash-basis-accounting Klinefelter, Danny and Dean McCorkle. (2011). Financial Management: Cash vs. Accrual Accounting. Texas A&M University. Accessed via the World Wide Web February 19, 2011. http://trmep.tamu.edu/cg/factsheets/rm5-16.pdf Petriesan, J.L. (2008). Cash vs. Accrual. Accessed via the World Wide Web February 19, 2011. http://www.helium.com/items/890492-accrual-basis-accounting-vs-cash-basis-accounting