Question

Professor’s Question: "Most companies will use accrual accounting. Why? It is easier to compare amounts from one period to another. The cash basis makes it more difficult to compare numbers. Why do we compare numbers in a manufacturing company? Why do we compare numbers by products? Why do we compare numbers by similar companies? Do you think Apple and Samsung keep up with numbers from each other and their other competitors? In business, one of the most important things is cash flow? What is meant by cash flow? Why would you think cash flow is so important? Give some examples.

Answer 1

1	On accrual base accounting make easier to compare the number among companies. Cash basis accounting numbers are not comparable due to different cash flow of all companies. All companies has different terms of payment for creditors and also realization from debtors, therefore cash base accounting don't recognize actual revenue and actual profitability
2	By comparing numbers in manufacturing company, we able to know growth or degrowth of the company
3	By comparing numbers by product, we able to know the growth or degrowth of particular product
4	It is irrelevant to compare numbers of distinct nature companies. It's relevant to compare number of similar companies and will be able to know the company performing or not performing
5	Yes. All similar companies compare their numbers with their competitors to know the direction of competitors companies
6	Yes Cash flow is very important in business. Cash flow is being maintained to know cash flow status of operational activities , investing activities and financing activities. Following cash flow properly we able to know availability of cash to pay the creditors in time and also commit for future payment accordingly. If we don't maintain cash flow, we will not able to know true surplus or conversely negative balance and we will not be able to manage our cash out flow