Inventory is usually the largest current asset of a business that sells products. If the inventory account is bigger at the end of the report period than at the beginning of the reporting period, the amount of business actually paid in cash for that inventory, that business is good If the accountant occurs, the accountant will cash flow from the profit Deduct inventory increase from net profit to determine.
The asset account for prepaid expenses functions in much the same way as changes in inventory and accounts receivable accounts. However, the change in prepaid cost is usually much smaller than the change in these other two asset accounts.
The initial balance of prepaid expenses will be charged to the current year's expenses, but cash was actually paid last year. During this period, the business will affect cash flow in this period, but will not affect the net profit up to the next period Easy right now for pre-paid expenses in the next period, right?
As the business grows, it has to pay before insurance Prepay payment, inventory, prepaid cost increase for something like that insurance premiums, and that stock of office supplies, paid for the growth of business The price of cash flow that must be. Rare business can be raised by the proportion of these assets without increasing their sales.
The delay in the effect of cash flow is the price of business growth. Increase the need to understand managers and investors Growth due to realistic accounts receivable without increasing sales. In the real world of business, you can not enjoy the growth of revenue without adding additional costs.
Revenues and Receivables
Many companies are sales, expenses what is recorded on the drive's balance sheet. In other words, they cause business assets and liabilities. One of the more complicated accounting items is accounts receivable. As a fictional situation, imagine a business that provides 30 days credit period to all customers.
Showing accounts receivable assets is the creditable feat of your products that bought how much money you bought. It is a promise when business receives. Basically, accounts receivable is the amount of sales that is not collected at the end of the accounting term. Cash will not increase until the business actually collects this money from business customers. However, the amount of accounts receivable is included in total sales for that same period. Even if the business has not yet got all the money from the sale, did the sale. Sales revenue is not equal to the amount of cash that the business gathered.
In order to obtain the actual cash flow, the accountant must subtract the amount of credit sales not collected from cash sales revenue. Then add in the amount of cash collected for credit sales made during the previous reporting period. If the amount of credit sales of the business done during the reporting period is greater than what was collected from the customer, the accounts receivable account will increase over the period and the business
If the amount collected during the reporting period is greater than the credit sales, the accounts receivable will decrease over the reporting period and the accountant will be the same as the accounts receivable at the beginning of the reporting period
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