How do I identify which accounting method Netflix used based on the 2018 financial statement? How does the company treat its intangible assets/amortization?
Homework Answers
A. Accounting methods are the rules followed by a company in reporting revenues and expenses. There are two types of methods used for this purpose, they are Accrual basis and Cash basis. Accrual basis represents the transactions that are happened in a particular period, even though the cash pertaining to such transaction is not received or paid. Cash basis represents the transactions that are actually received and paid during a particular period.
Under the cash system, the company should prepare an Income and Expenditure statement and under the accrual system, the company should prepare a profit and loss statement. There are so many ways to find out the accounting method used, out of them here are some of the examples to find out the accounting method used:
1. By observing the sales invoices issued and the sales recognized by the company, we can ascertain the accounting method used.
2. By observing the given financial, the following scenario has been drawn:
In the cash flow statement, depreciation and other non-cash items were added back/deducted to/from the Net Income, as the non-cash items were included in the Income statement it can be conferred that the given statements are prepared under accrual system.
In the cash flow statement, current liabilities/current assets are increased/decreased and the same presented in the cash flow. In the accrual system, changes that happened in the income statement will be reflected in the working capital and the same will be presented in the cash flow statement.
Like this, there are so many implications to find out the accounting method.
B. In the balance sheet, the company has not shown any intangible asset balances during all the years. But in the cash flow statement, there are some amounts reflected. That means whatever the amount incurred on the intangible asset during the years, the company is amortizing the same in the same year itself.
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valuation. This analysis should include identifying trends within
each company and major differences between each company.
Write a summary of the common size analysis that identifies the
companies’ strengths and weaknesses.
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