1.4 Interpret Change in Financial Position Over a Period ...



1.4 Interpret Changes in Financial Position Over a Period of TimeLearning Objective:After studying this chapter the student should be able to explain changes in the financial position of an entity over time.Tasks:?Classify revenues and expenses on a cash basis?Calculate net income on a cash basis for a period of time.?Enter relevant report data to solve financial position equation (using macros provided in Excel template)Key Terms: Expense Inflow Outflow Revenue CostIncome Statement:The purpose of the Statement of Financial Position is to reflect the assets, liabilities and net assets (financial position) as of a single date. Once we have determined the financial position of an entity at a single point in time, we can expand that view to track progress or performance of the entity. Over a period of time there will likely be significant changes. Looking at the Balance Sheet for an entity on July 31st and the same report for August 31st will only show net change. It will not help us to understand why the change occurred.The Statement of Activities or Income Statement reflects activity for a period of time, such as a month, quarter or year. Examination of the detail of the report helps to explain the resulting changes in the statement of financial position.For simplicity’s sake, we will consider our entity to be reporting on a cash basis. Cash basis accounting recognizes revenues in the period the cash is received. The inflow of cash will increase the asset cash, and correspondingly increase financial position. Revenues are inflows from normal operating activities. In businesses they are earned in exchange for services provided. In not-for-profits, revenuesmay be contributions from donors. In government entities, inflows come in the form of tax revenues, fees for service, and sometimes fines and penalties.Under the cash basis, costs, or cash payments for goods and services received, are also reported in the period in which cash is paid. Recording outflows decreases assets (cash) and correspondingly decrease financial position.The equation that represents the relationship of cash inflows to cash outflows from the beginning of the period to the end of the period is stated as:Revenues – Costs = Net Change in Financial PositionCosts are outflows from normal operating activities. Costs may be classified as expenses or expenditures, depending upon the measurement methodology used. We will elaborate on this in later modules. For now we will define “cost” as an outflow of cash. ................
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