By L Dawson
The Cash Flow Statement is made up of three sections. The first section is operating activities. Operating activities include your company's profit or loss and non-cash items that affect your profit without affecting cash. Examples of these types of non-cash expenses are depreciation and bad-debt expense. Also included in this section are changes to your operating assets and liabilities. Operating assets and liabilities include accounts receivable, prepaid expenses, accounts payable and accrued liabilities. A common feature of operating assets and liabilities is these items have been reflected in the Profit & Loss Statement in a period different from the period in which they were paid.
The second section of the Cash Flow Statement is investing activities. Investing activities are items such as property and equipment or loans receivables. An interesting aspect of investing activities assets is that they, unlike operating assets, generally do not affect the company's profit. In other words, investing assets do not represent revenue or expense items.
The third and final section of the Cash Flow Statement is financing activities. Financing activities are debt and equity items. If you increase or decrease your debt, that change is included in financing activities. Equity changes such a capital contributions or shareholder distributions also are reflected under financing activities. Like investing activities assets, financing activities liabilities and equity do not represent revenue or expense items.
The sum of the three sections: Operating activities, investing activities and financing activities is your cash flow for the period being reported. A positive number indicates an increase in cash and decrease indicates a decrease in cash. Now it's time to take a closer look at the Cash Flow Statement and see why your cash flow is different from your profit.
Compare your cash flow to your profit. If your cash flow is higher than your profit, you are either liquidating assets or increasing your debt, which is negative for your business. On the other hand, it could be that you are increasing your capital, which is a positive for your business.
If your cash flow is less than your profit, you are increasing your assets, such as purchasing property and equipment for future growth or paying down your debt. These are both positives for your business. But it could mean that your money is being tied up in accounts receivable because collections have deteriorated and your business is weakening. Or it could be that you are decreasing your capital, which is a negative for your business.
Cash flow is an indicator of where you are spending your money and the future strength of your business. Small business owners generally do not realize the importance of comparing their past years Cash Flow Statements to measure their business growth. Some of them are ignorant of the basic rules that one should follow to compare their past Cash Flow Statement with the current one. So now that you are aware of these formulas take a few minutes and review your Cash Flow Statement. Compare it with last year and see how your business is progressing. You will be surprised at how much valuable information is contained in your Cash Flow Statement.
Linda Dawson is a Certified Public Accountant with more than 25 years experience helping small and start-up businesses. Dawson & Associates has just introduced its latest service, the Virtual Accounting Office. Learn more about this exciting new product at MyVao.com. Or check out the Dawson & Associates website at Dawsoncpa.com
Article Source: http://EzineArticles.com/?expert=L_Dawson
http://EzineArticles.com/?Beyond-Taxes---How-Your-Cash-Flow-Statement-Can-Help-You-Run-Your-Business&id=1531056
Tuesday, September 30, 2008
Wednesday, September 24, 2008
Equipment Capitalization and Cash Flow Accounting Strategies With Lease Backs
By Lance Winslow
In several industries companies and individuals can buy equipment such as machinery, boats or even aircraft and then lease them back to rental agencies, marinas or fixed base operators (aviation). This is a great accounting strategy allowing someone or company to own an asset and have it pay for itself through the rental fees. The owner of the asset has the ability to tax full advantage of the tax write off of this asset and depreciate it as a business in itself, a rental business, even if the individual owns the item.
Once the equipment, boat, or aircraft is fully depreciated, paid for the owner of the asset still owns it at its then current book value. Many years back, I had sold aircraft leasebacks for flying schools and aircraft charter companies, and as well as such an accounting strategy looks on paper, it is not always as clean, crisp and consistent as the proforma may have you believe. The accounting of leasebacks is serious business, not to be taken lightly.
For instance, if someone buys a new Cessna and leases it back to the flight school that aircraft will have some hard flying hours on its airframe, this could increase maintenance costs and wear and tear on the aircraft lessening its value prematurely even faster than the allowable tax depreciation schedule. Additionally, after a couple of years and before the aircraft is paid for it might need a new motor when the aircraft hits its TBO.
Further, the flight school may have newer aircraft on the line that are owned by the FBO (fixed base operator) which they will attempt to rent first or the students and instructors may prefer. Thus, there could be a deficit in the monthly maintenance costs, tie-down, insurance, and payment of the aircraft. So, before you use a leaseback accounting strategy for equipment of any type you need to treat it as a business and consider the reality of the inevitable. After all, anyone can make anything look good on paper.
"Lance Winslow" - Lance Winslow's Bio. If you have innovative thoughts and unique perspectives, come think with Lance; www.WorldThinkTank.net/.
Article Source: http://EzineArticles.com/?expert=Lance_Winslow
http://EzineArticles.com/?Equipment-Capitalization-and-Cash-Flow-Accounting-Strategies-With-Lease-Backs&id=1513009
In several industries companies and individuals can buy equipment such as machinery, boats or even aircraft and then lease them back to rental agencies, marinas or fixed base operators (aviation). This is a great accounting strategy allowing someone or company to own an asset and have it pay for itself through the rental fees. The owner of the asset has the ability to tax full advantage of the tax write off of this asset and depreciate it as a business in itself, a rental business, even if the individual owns the item.
Once the equipment, boat, or aircraft is fully depreciated, paid for the owner of the asset still owns it at its then current book value. Many years back, I had sold aircraft leasebacks for flying schools and aircraft charter companies, and as well as such an accounting strategy looks on paper, it is not always as clean, crisp and consistent as the proforma may have you believe. The accounting of leasebacks is serious business, not to be taken lightly.
For instance, if someone buys a new Cessna and leases it back to the flight school that aircraft will have some hard flying hours on its airframe, this could increase maintenance costs and wear and tear on the aircraft lessening its value prematurely even faster than the allowable tax depreciation schedule. Additionally, after a couple of years and before the aircraft is paid for it might need a new motor when the aircraft hits its TBO.
Further, the flight school may have newer aircraft on the line that are owned by the FBO (fixed base operator) which they will attempt to rent first or the students and instructors may prefer. Thus, there could be a deficit in the monthly maintenance costs, tie-down, insurance, and payment of the aircraft. So, before you use a leaseback accounting strategy for equipment of any type you need to treat it as a business and consider the reality of the inevitable. After all, anyone can make anything look good on paper.
"Lance Winslow" - Lance Winslow's Bio. If you have innovative thoughts and unique perspectives, come think with Lance; www.WorldThinkTank.net/.
Article Source: http://EzineArticles.com/?expert=Lance_Winslow
http://EzineArticles.com/?Equipment-Capitalization-and-Cash-Flow-Accounting-Strategies-With-Lease-Backs&id=1513009
Subscribe to:
Posts (Atom)