Recognition of revenues or expenses when earned or incurred, without regards to the actual timing of the cash transactions is used in the accrual method of accounting, or it can be described as the method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid.
2. When company starts its business operations the idea is to maximize their earnings in order to maximize shareholder wealth. From an analyst’s perspective one looks towards the core earnings because core earnings suggest the real profit generated from the core business operations, hence, we can have a better understanding of the performance of a company by looking at its recurring income rather than the net income.
Core Earnings indicate the following factors to the analysts:
Method of revenue recognition (Percentage Completion Method, Cost Recovery Method, Installment Sales Method etc) The amount of cost of goods sold and how COGS respond with respect to sales (Noreen, Peter & Garisson 210).
Choice of inventory valuation technique (LIFO, FIFO etc) Depreciation method and also choice of depreciation method with respect to Tax based Accounting (Noreen, Peter & Garisson 210).
Also we have to take into consideration that recurring income or core income is distributed to the debt holders and stock holders who are financed in the business in the form of Debt Financing and Equity Financing. Debt holder is interested in the Interest Income they earned in order to provide the debt to the company while stockholder enjoys the dividend.
FASB topic 220-10-45 outlines what is required for companies to report comprehensive income (CI). To do this, the entity must report CI either in a single continuous financial statement or in two separate but consecutive financial statements. If an entity prefers to report CI in a single continuous financial statement, then the entity must report the components in two sections entitled net income ...
3. As we know the fact that direct method of computing and reporting the net cash flows from operating activities shows the specific cash inflows and outflows comprising the operating activities of the business.
Also direct method converts accrual based income statement amounts into cash flows by adjusting for changes in related balance sheet accounts (Noreen, Peter & Garisson 150).
Also the direct method informs the reader about the nature and dollar amounts of the specific cash inflows and outflows comprising the operating activities of the business.
Profits are the life-line of any business entity. No entity can survive for long and accomplish its other goal unless it is profitable. Continuous losses drain assets from the business, consume owners’ equity and leave the company at the mercy of creditors. Quality of earnings suggest the fact that company is viable and working in a sustainable manner, and keeps a watchful eye on how to generate more revenues that make the current asset.
4. PROS: When we extend credit to a customer it makes an impact in a way that customer is bound to transact with the company because they feel that the company gives them facility of extending their credit and it is now up to them when they pay their amount, so on the whole, in future transactions the customer would most likely be willing to make a deal with the company.
CONS: It slows the average collection period and it has a negative impact on the current asset section and the operating cycle. If the company restricts the customer to pay their bills on time it might create a doubt in the customer’s mind that this company can’t facilitate him, so he is less likely to do business with them in future. From the company’s perspective, a slow recovery process will raise the chances of the occurrence of bad debts.
... have to have an account where customers have to put some information about payment method and the store just accept credit or debit card ... their plastic money and they have it in their bank account. Cash and Credit Card are ways to use money but most people ... others use a traditional way to pay salaries by cash. For example, insurance companies usually give their employees a debit card to ...
Average Collection Period = 360/(Sales/Avg. AR): This ratio spells the success or failure of a company’s credit and collection policies. This ratio also helps us to judge how well a company is performing with respect to granting credit and collecting its receivables. This ratio tells us how many times the company’s average investment in receivable was converted into cash during the year. Management closely monitors these ratios in evaluating the company’s policies for extending credit to customers and the effectiveness of its collection procedures.
Percentage of A/R method is also stated as balance sheet approach which estimates and records credit losses. This approach is based on aging schedule and the allowance for doubtful accounts, which are adjusted to a required balance. While on the other hand, % of sales method focuses on estimating the uncollectible accounts expense for the period. Based on past experience the uncollectible accounts expense is estimated on some percentage of net credit sales. Allowance for bad debts’ balance most closely resembles the amount of A/R a company won’t collect, according to the % of A/R method because bit by bit aging helps us in calculating doubtful accounts.