Module 2 Supplement - Cash Flow versus Accural

Cash Flow versus Accrual ROSS SCHOOL OF BUSINESS Winter 2006 Module 2 Supplement Accounting 501 Jefferson P. Williams Ross School of Business University of Michigan Cash Flows Accrual Income Receipts Revenues Expenditures Expenses Cash Flows v. Accruals Cash Flows do not equal Accrual Income Receipts do not equal Revenues Expenditures do not equal Expenses Cash Flows v. Accruals Cash Flows v. Accruals I. Expenditures Precede Expenses Balance Sheet Manifestation: Asset Liability Examples: Equations: Cash Flows v. Accruals I. Expenditures Precede Expenses Balance Sheet Manifestation: Asset Liability Examples: Prepaid Expense (e.g. Rent) Plant and Equipment Equations: Assett-1 + Expenditurest - Expenset = Assett Expenditurest = Expenset + Growth in Asset Cash Flows v. Accruals II. Expenditures Lag Expenses Balance Sheet Manifestation: Asset Liability Examples: Equations: Cash Flows v. Accruals II. Expenditures Lag Expenses Balance Sheet Manifestation: Asset Liability Examples: Interest, Taxes, Utilities, Warranties, Salaries, Benefits Equations: Liabilityt-1 + Expensest - Expenditurest = Liabilityt Expenditurest = Expenset - Growth in Liability Cash Flows v. Accruals III. Receipts Precede Revenues Balance Sheet Manifestation: Asset Liability Examples: Equations: Cash Flows v. Accruals III. Receipts Precede Revenues Balance Sheet Manifestation: Asset Liability Examples: Most service industries, Airline ticket sales Equations: Liabilityt-1 + Receiptst - Revenuet = Liabilityt Receiptst = Revenuet + Growth in Liability Cash Flows v. Accruals IV. Receipts Lag Revenues Balance Sheet Manifestation: Asset Liability Examples: Equations: Cash Flows v. Accruals IV. Receipts Lag Revenues Balance Sheet Manifestation: Asset Liability Examples: Most sales are ?on account? Equations: Assett-1 + Revenuet - Receiptst = Assett Receiptst = Revenuet - Growth in Asset