Introduction
This report was requested by Babs Lee with the purpose to make a detailed analysis on required topics using data from the financial reports of a wholesale business called Isaleh. In this report, the income statement prepared using the accrual basis of accounting will be explained, the differences between the accrual basis of accounting and the cash basis of accounting will also be discussed. Moreover, explanation will be made on working capital and the importance of managing it. In addition, this report will give a definition of credit sale and illustrate reasons of using credit sale. Finally, this report will make few recommendations on the operations of Isaleh.
Analysis
(i) Explain why the Income Statement is prepared using
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(2005), the income statement is based on the accrual basis of accounting, while the cash flow statement is based on the cash basis of accounting. Under accrual basis of accounting, businesses count sales as revenue when the order is placed. Under cash basis of accounting, revenue is not recognized until the actual payment is made.
3) Analyzing differences in the case of Isaleh
In the case of Isaleh, the income statement shows that the main income is contributed by Sales ($588,000) and the gross profit is 140,000. The total expense is $110,000 and the net profit is $30,000. It can be concluded that the major profit comes from sales. Using the accrual basis of accounting in the income statement, Isaleh count sales as revenue when the order is placed, and it is also easier to match sales with the incurred expenses in the same time period.
Meanwhile, the cash flow statement clearly shows that the cash outflow comes from three types of activities including Operating Activities ($486,100), Investing Activities ($6,000) and Financing Activities ($37,500). As the cash inflow comes from Customers ($526,500) in operating activities, it can be stated that the main income is contributed by sales related to customers. Under cash basis of accounting, Isaleh’s cash outflow and cash inflow are recorded only when they actually
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