Identify the Differences Between a Cash Flow Statement and a Profit and Loss Account Essay Example for Free

Identify the Differences Between a Cash Flow Statement and a Profit and Loss Account Essay There is undoubtedly, a clear difference between what is termed â€Å"cash† and what â€Å"profit† is and by extension a cash flow statement and a profit and loss statements. Notwithstanding these differences, each statement gives a different yet important view of organisational performance. Cash according to Holmes et al 2005:166 is â€Å"cash in hand and deposits repayable on demand less overdrafts repayable on demand; i.e. they can be withdrawn at any time without penalty. Cash includes cash and deposits denominated in foreign currency. † Once, accounts were comprised of just the balance sheet and the profit and loss statements. However in the late 1960’s, a period characterised as a high inflationary period, it was felt that historical costing convention which is indicative of the profit and loss account, provided information that was outdated and as such provided little insight on the current market value of companies and by extensions their profits. Therefore, there became a need for an additional statement- the cash flow statement. â€Å"A cash flow statement is a statement produced either for management or external reporting purposes showing, by broad categories cash receipts and payments in a period† (Leicester, 2001. 10.3), and is intended to supplement the profit and loss account and the balance sheet. The cash flow statement therefore, assists creditors, investors and generally all stakeholders in evaluating the liquidity and solvency of a business or rather, shows changes in cash be it negative or positive i.e. cash outflows and cash inflows. The Cash flow statement is divided into three main sections: 1.Core operations (operating activities) 2.Investing 3.Financing A typical cash flow statement can be seen in Appendix B. Cash flows from operating activities generally include transactions that are associated with the calculation of income. It also includes items which are involved in the production or purchase of merchandise, the sale of good and/or services to the organisation’s customers and expenditure relating to the general administration of a business. Under the broad heading of investing activities, are found important element relating to cash flow in an organisation. These transactions involve making and collecting repayments on loans, purchasing and selling of plant assets and other productive assets. All other investment activities are generally classified under this heading. â€Å"Changes in debt, loans or dividends are accounted for in cash from financing. Changes in cash from financing are ‘cash in’ when capital is raised they’re ‘cash out’ when dividends are paid. Thus if a company issues a bond to the public, the company receives cash financing. However, when interest is paid to bondholders, the company is reducing its cash.† (Heakal, 2004) It is now important that the issue of profit and the profit and loss account be examined. Profit by definition is the excess of revenue over expenditure. Revenues are increases in the company’s assets from its profit-driven activities, resulting in positive cash flows (inflows). Conversely, expenses are decreases in the company’s assets from its profit-driven activities, which results in negative cash flows (outflows). Net income/profit is therefore, the difference between the two. According to Williams et al 2002:54 if a company’s expenditure exceeds income then the difference is a net loss, suggesting that the enterprise has suffered a loss. Alternatively if the company’s income exceeds its expenditure the difference is a net profit. â€Å"The profit and loss account is a financial statement which shows the profit (loss) made by a business during a defined period of time (normally one year). The account also shows the uses to which the profit has been put (or how losses were financed).† (Jewel 1998:327) Sometimes referred to as the revenue account, the profit and loss statement is divided into four parts: 1.How the profit (loss) was earned 2.The expenditure for the period under review 3.How much was taken by taxation 4.What happened to the profit (or loss) that was left after taxation Appendix A shows a typical profit and loss account. It is a truism that a business must make a profit in order to be successful. This is imperative since profits are needed to pay out dividends to shareholders in the case of a company and to reward partners of proprietors in the case of a sole trader or a partnership. Irrespective of the form of business organisation, â€Å"some profits are retained within the business as reserves or as proprietor’s funds, to finance the development and growth of the business† (Leicester 2001, 3.45). Consequently, although a business can experience occasional losses, it is imperative that it be profitable in the long run. A loss signifies that the value of resources used up in a period to generate sales/revenue is more than the sales/revenue generated in that period. These lose as a result, cause a reduction in the overall value of a business and can eventually lead to the collapse/liquidation of the organisation. When an organisation publishes its profit and loss accounts and a profit is shown, users of the statements may think that the business has â€Å"cash† and in turn expect different benefits. The Shareholders for example, might believe that if the company makes a profit after tax of say $200,000 then the company is in a position to pay out dividends. Similarly, employees might believe that the company can afford an increase in wages in the subsequent year. The fact is â€Å"profit does not always give a useful or meaningful picture of a company’s operations. Readers of a company’s financial statements might even be misled by a reported profit figure† (ACCA, paper 1. 1 Study text June 2003, 360). The fact is that profit does not necessarily mean an increase in cash. For example, an oil company on presenting its final accounts may show a large profit figure primarily because of large amounts of stock which it holds. Although the company may be profitable, it may be experiencing serious cash flow problems. Too much stock therefore according to many writers is tied-up cash and should be avoided as much as possible. Cash therefore according to Larson and Miller 1992:726 â€Å"is the lifeblood of a business enterprise. In a sense, cash is the fuel that keeps a business alive. With cash, employees and suppliers can be paid, loans can be repaid and owners receive dividends. Without cash, none of these things can happen. In simple terms, a business must have adequate amounts of cash to operate.† Hence, profits/losses shown by the profit and loss account and net cash inflow/outflow shown by the cash flow statement do not represent the same thing. Therefore, when businesses are profitable, which is a long-term requirement; it must pay in cash, its goods and services, capital equipment, the workforce and for that matter, all expenses incurred in the line of the business’ operation. If cash is not available to pay these expenses when the fall due, the business will slowly lose its goodwill, employees, suppliers and it will be forced into liquidation as was previously suggested. 1.If a non-current asset is purchased an outflow of the full amount is shown under Investing Activities in the cash flow statement for that period but only depreciation, which is part of the cost of that asset, is shown in the profit and loss account. This depreciation amount is not shown in the cash flow statement since it is not an actual movement of cash. The profit and loss statement therefore, attempts to spread the cost of the assets over its estimated useful life by a depreciation charge every year until it is expensed. By so doing the cost of the asset is not absorbed in the accounts in one year as is done by the cash flow statement, but over a period of time. 2.When shares are issued and cash is received from the sale, the cash flow statement will show this as a source of cash i.e. a cash flow under Financing Activities but this transaction does not have any effect on the profit and loss account. Similarly, if a loan is obtained, this is reflected as a cash inflow under financing activities but has no effect on the profit and loss account until subsequent interest charges have been made then it is shown. The same is also applicable for businesses which enjoy the overdraft facilities accorded to them by commercial banks. 3.After the sale of a non-current asset the profit or loss which is the difference between the sale price and the net book value of the asset is recorded in the profit and loss account while the entire proceeds is recorded in the cash flow statement as an increase in cash inflow under investing activities. Thus, while the cash flow statement shows inflow of cash, the profit and loss account may show a loss on disposal of the non-current asset simply because the asset was sold less than the net book value consequently representing a loss which the company has made. 4.The profit and loss account reports the total value of sale in a year less the cost of sales (â€Å"the costs directly associated with making or acquiring your products. Costs include material purchased from outside suppliers used in the manufacture of your product, as well as any internal expenses directly expended in the manufacturing process.†BusinessTown.com 2003) which is profit. Operational cash flow is the difference between cash received and cash paid from trading. If there are credit sales (receivables), cash received will differ form the value of the sales and conversely cash paid will differ from the cost of sales if there are credit purchases (payables). The difference therefore, between sales and cash received is because of changes in the amount of debtors and the difference in cost of sales and cash is because of changes in the amount of creditors. It is worthy to note that operational cash flow in the cash flow statement differs from profit in the profit and loss account. Because business accounts are prepared on an accruals basis and not on a cash basis, a sale or purchase is accounted for in the year in which it was made even if cash is exchanged in subsequent years. This practice is exercised in most businesses who, if they do not sell on credit may purchase on credit and if cash accounting is used, the accounts would not represent a â€Å"true and fair picture† of the business activity in a given period. The accounting convention when used is an application of the accrual concept. Therefore there is recognition that while the profit and loss account is affected by the accrual concept, the cash flow statement is not as was previously stated. It should be noted also, that profit, which is shown in the profit and loss account (Net profit before taxes†¦Appendix A) is really a reflection of future cash for the company because the entries recorded are from transactions done based on the accruals concept. This can be illustrated by means of a cash flow statement done using the indirect method. Using the indirect method of preparing a cash flow statement, â€Å"net profit or loss is adjusted for the effects of transactions of a non-cash nature e.g. depreciation, any deferrals or accruals of past or future operating cash receipts or payments and of income or expense associated with investing or financing cash flows† (ACCA, paper 1.1 Study text June 2003, 365). Appendix A confirms that the net profit of $ 3,390 million reported in the profit and loss account after adjustments became $ 410 million, the same cash amount reported in the balance sheet in Appendix C, extract under current assets. Users of the profit and loss account therefore as was established earlier may be missed by the profit figure reported. However, cash reported in the cash flow statement is authentic and represents the actual liquid position of a business organisation as at the balance sheet date. There have been frequent arguments that profit does not give an authentic view of the organisation’s performance as has been established thus far. Since the making of a profit will not necessarily result in an increased cash balance, one can conclude that a company’s performance and prospects depends not so much on profits earned in the period but more realistically on cash flow or rather the company’s liquidity. Bearing this in mind, many investors now find the profit figure reported in the profit/loss account less reliable than the cash balance reported in the cash flow statement because it is felt that the profit figure can be manipulated to reflect the producer’s bias. This notion is supported by Joseph Bernardino former chief executive of Anderson quoted in The Economist. Bernardino argued that â€Å"our financial reporting system is broken† with â€Å"many investors now believing that companies can manipulate their accounts more or less at will, with the aim of producing profits that increase steadily over time. Provisions are bumped up in goods years and later released; or the value of an acquisition is slashed; there are plenty tricks. The solution in the meantime may be to look at the cash, which is harder to disguise or invent.† The cash flow statement is therefore, unambiguous and provides information which is additional to that already provided in the other final accounts. Additionally the cash flow statement provides information based on activity instead of by balance sheet classifications and shows changes in actual cash, thus, providing additional information over the balance sheet and profit and loss accounts. The dilemma as a result becomes fairly simple: there is cash or there is no cash. For this reason, the cash flow statement has several advantages which give shareholders and investors an idea as to how the funds of a company are being managed. These advantages include: 1.Cash flows allow for better comparisons and an understanding of various companies financial performance as it reports on how the cash was earned and spent as well as the reason for the difference between reported profit and related cash flows. 2.It allows for easier preparation of cash flow forecasts which is more useful than profit forecasts. 3.Cash flow reporting satisfies the needs of its users. It provides the information that enables management to make well informed decisions. It also assists shareholders with stewardship accounting while better serving the information needs of employees and creditors on the company’s liquidity status. 4.Cash flow is easily understood than profit which is based on accounting conventions and concepts such as: accruals convention or the matching concept and therefore, is easier for the layman to understand. 5.Creditors are more interested in a business’s ability to repay their debts than its profitability. Profits may indicate that cash may be available at later date, while cash flow suggests a direct view of the business’s cash situation i.e. how much money is readily available. 6.Cash flow accounting directs management’s focus on the optimum use of company assets in order to generate positive cash flows bearing in mind that cash is essential for the survival of an enterprise. In any organisation, a strong financial position is one which shows that a business has relatively little debt and large amounts of liquid assets in comparison to its current liabilities. Additionally, a strong cash balance generating with ease and efficiency from its operating activities further indicate financial strength. Large companies are therefore, mandated by law to prepare financial statements and it is in these that their performance is assessed. The users of financial statements are interested in solvency, the ability to pay debts and profitability, which creates equity. Management is also interested in these statements as it will assist them in improving the areas where performance is weak. Despite the argument presented thus far, it must be noted that â€Å"no man is an island.† This suggests that in isolation, a true understanding of a business’ performance cannot be attained by an examination of only the cash flow statement. When used in conjunction with the profit and loss account and the balance sheet, the cash flow statement gives shareholders and the other users of the financial statements the required information on viability, solvency, liquidity and the financial flexibility of a company at a specific time, essentially at the balance sheet date. Furthermore, the conjunctive use of the cash flow statements give an indication of the relationship between profitability and a company’s ability to generate cash, consequently, defining the quality of the profits reflected in the profit and loss account. Should one therefore, require an overall well calculated view of an organisation, no statement, be it profit and loss account, balance sheet or cash flow statement should be looked at in isolation. For example, in St.Lucia a new shopping plaza is on the verge of opening. Needless to say that Blue Sky Limited is now investing heavily in the refurbishment of the building in which it is to be housed. A close examination of Blue Sky Limited’s accounts would reveal large outflows with little inflows. It therefore becomes necessary to examine Blue Sky Limited’s cash flow accounts in conjunction with the profit and loss account and the balance sheet so that a more wholesome picture can be obtained. Simply put, â€Å"the cash flow statement is simply a part of the puzzle. Analysing it with the other statements can give you a more overall look at a company’s financial health† (Investopedia.com 2005). This notion is supported by Aharony et al 2003 in their study who posits that in order to understand which statement gives a better view of organisational performance, it becomes imperative to look at the â€Å"life cycle status† (LCS) of the of the business in question. Aharony et al therefore argue: Previous researchers identify four LCS’s: Start-up, maturity and decline or stagnation. At the start-up stage there are normally only a few assets in place. Growth opportunities constitute the major asset of the firm at that stage. Cash flow operation and the earnings are low, and there is a relatively great need for cash to finance the realization of these growth opportunities. At the growth stage there are more assets in place and some income is generated (Black, 1998). Sales and revenue growth rates are higher than average in the growth stage and so are investments in production facilities (Anthony and Ramesh, 1992). At the maturity stage firms experience low or no cash and needs are mostly satisfied by internal sources and at the decline or stagnant stage growth opportunities, if any, are likely to be limited, competition intensifies, and the firm’s financing costs are more expensive.(Aharony et al 2003) The implication of Aharony et al’s argument is that the cash flow statements may not necessarily be the best statement to look at a particular point in a business’ LSC because at certain points, liquidity and solvency may be low. At such points, therefore a business’ performance can be better understood by introspection of the profit and loss statement which relies heavily on accrual accounting or a combination with the balance sheet and cash flow statement. Consequently the stage of a business’ life cycle plays an important role in the understanding of a business’ performance. Despite its limitations e.g. its inability to express opinions whether or not expenditure was necessary of will be profitable, or fail to report on the cause of an increase in the firm’s receivables due to poor stock control or changes in policy, the cash flow statement remains the most detailed and accurate statement when reporting on a company’s liquidity/solvency. Therefore, in comparison to the profit and loss account, the cash flow statement definitely gives a better view of organisational performance, if for example, each statement; the cash flow statement and the profit and loss statement, is to be examined in isolation.

Lord of the Rings: Two Towers vs. Harry Potter: Prisoner of Azkaban Com

Lord of the Rings: Two Towers vs. Harry Potter: Prisoner of Azkaban Comparison In the two novels, Lord of the Rings: The Two Towers and Harry Potter: The Prisoner of Azkaban, by J.K. Rowling, there is a distinct relationship that is created through the idea that there are the chosen individuals are the only ones that can save the world. The first novel, Lord of the Rings: The Two Towers is a novel generally focusing on uniting  ¡Ã‚ §Middle Earth ¡Ã‚ ¨, a term used to describe the human world, to defeat the enemy forces of evil controlled by a character described as pure evil named NAME. The actions of one small hobbit name Frodo Baggins, a race similar to humans, that will in fact determine the outcome of who is triumphant; not the actions of the hundreds of thousands of soldiers protecting the vast armies of Saruman. Although author ¡Ã‚ ¦s style is completely different, considering the novels were written in separate generations, you could find many comparisons when relating back to the idea of  ¡Ã‚ §good versus evil ¡Ã‚ ¨. In the second novel, Harry Potter: The Prisoner of Azkaban, there is a young boy named Harry Potter, whose parents were famous wizards but were allegedly murdered by an evil wizard named Sirius Black. His past is constantly being reminded to Harry, as news that Sirius Black has escaped from prison and is seeking out Harry. Harry and his close friends set out of an adventure to find the truth and lies of his past, only to uncover more treachery, lies, and deception. These chosen heroes often follow a  ¡Ã‚ §collective unconscious ¡Ã‚ ¨ [1], meaning that patterns emerge in all  ¡Ã‚ §good versus bad ¡Ã‚ ¨ scenarios that are generally alike. There is the hero ¡Ã‚ ¦s beginning, where a character is destined to do great things but is constantly in a struggle for power, the call to adventure, where heroes become very important is given a chance to prove himself, and the reward, when a character successfully completes his quest, there is some form of gratification and celebration [2]. Regardless of overwhelming odds to defeat evil, the forces of good call for reprisal, uniting their forces to defeat the enemy.   Ã‚  Ã‚  Ã‚  Ã‚   In hero ¡Ã‚ ¦s beginning, the characters are introduced as very important and are going to serve a purpose, greater than him self which indefinitely will lead to the next stage of a hero ¡Ã‚ ¦s recognized stature. Although it may not be evident at a specific time, ... ...d ensure peace for the future. Their goals were separate, but the reward of pride, respect and honor are generally the same among heroes.   Ã‚  Ã‚  Ã‚  Ã‚  The heroes share very many qualities, but it is their differences that set them aside from each other. Harry Potter and Frodo Baggins would be considerable adversaries consider how hard they tried to achieve their goal. Not once did they stop because they were scared, not once did they turn around because they were tired, not once did they doubt the people that mattered to them. Frodo and Harry may be some different time periods, even in their fictionist world, and even the novels were written in different generations, but the idea of good triumphing over evil rules.   Ã‚  Ã‚  Ã‚  Ã‚  So you are still asking yourself,  ¡Ã‚ §What makes a hero? ¡Ã‚ ¨ The general answer that can be given is based around the principals that good is fighting to eliminate the ghastly. In both of the novels, not only are the heroes the heroes, but the people that do not get the gratification. The people that help out the main characters are just as important than people like Harry Potter and Frodo Baggins, but the elimination of evil is a reward that can be justified by anyone.

Industrial V.S. Pastoral Essay

No other book has ever made me want to be a farmer more (or at all) than The Omnivore’s Dilemma by Michael Pollan. No other book has placed such a dark cloud of doom and gloom over such a seemingly simple topic such as food production. I’m of course not talking about two identical models. One model is of industrial agriculture contrasted by pastoral agriculture. In his research Michael Pollan visited farms of both styles, got to know the onsite operations, followed the food to its ultimate destination, and finally ate a meal created with the very ingredients he spent a week investigating. Michael describes the farm owned by George Naylor, which is of the industrial model, as being fairly easy in terms of manual labor but extremely difficult in the detective work. Detective work usually isn’t something that gets brought up often when talking about farms; here it is referring to the journalistic tracking that Michael Pollan had to do with Mr. Naylor’s staple crop – corn. The difficulty in following a bushel of corn from the Naylor farm is his corn, along with the majority of corn grown in the U. S. will eventually wind up in practically everything we eat and use. He does a fabulous job of painting a picture of this river of corn and how it ebbs and flows throughout our lives eroding any dietary connection we once might have had to nature. Nature is after all a system based on diversity and here we see an entire nation built on and fueled by a single plant. The carbon in our flesh has even been tested and the findings were we are, after water, predom inately corn. I was starting to think that there were too many chapters in this book about corn! It just kept going and going but once I realized how much it is entwined in our lives and how perhaps this is the only account of someone illuminating that truth it started to seem necessary. As those carbon tests showed we are what we eat, Pollan shows in his book we are what we eat eats. Just as diversity is the spice of life in an ecosystem so too is it necessary for the physical health of animals. We humans know that very well and apply it readily to our own diets but what happens when we don’t allow nature to run its course in the meals of our meals? The nutritional content suffers immensely; to the point where our entire notion of healthy foods is skewed. An example used by Pollan is our idea of the nutritional content in red meat and fish. It is considered self-evident that an excess of red meat will cause all sorts of health problems. Likewise it is pretty well known that most fish, especially salmon, is rich in the good omega 3 fats and should be a staple of our diets. Omega 3 fats are produced in the leaves of plants while omega 6 fats are produced in the seeds of plants. If a cow was grass fed he would produce a healthier steak than the fillet of a farm raised salmon. This is because that salmon is most likely raised on corn. One would think that the flip side of this coin would be an organic farm. Well that same person would probably be very shocked to read what Michael Pollan had to say about organic. People might even feel duped by places like Whole Foods. As it is described in the book organic should realistically be read â€Å"industrial organic† for the farms and slaughterhouses are hardly different at all. In fact, instead of steering it onto a whole new track the organic rules and regulations only make it that much harder to run a traditional industrial operation. What the author shows as the antithesis to industrial is pastoral. In this section he visits the polyface farm of Joel Salatin which is reminiscent of a farm you might find in the movie Babe. It is actually a huge relief to read about because up to this point in the book you are starting to question if this kind of farm even exists. In this parallel universe monoculture is a filthy word and the practices found in industrial food production are nothing short of reprehensible. This model mimics nature therefore it is complex and interdependent; each and every plant and animal are so entwined in each other’s existence it really begs the question ‘what came first the chicken or the egg? ’ But that is the whole point of polyface farming. Only through diversity (and remaining in the local market) can sustainable agriculture be achieved. Or put another way, all of our environmental/agricultural problems start from attempting to create a monoculture ecosystem. Ruminants graze the grass chewing about ? of the blade while simultaneously dropping cow pies. The bottom part of the grass that cows do not eat is favored by the chickens that follow in the hoof prints before them. Around this time the cow patties start to grow ripe with larvae which become extra protein for the chickens. While the chickens scratch around the cow dung they consequently spread the manure for the farmer. This is only a small piece of the pie in terms of the interactions between all species that live and work on polyface. This is also one of the cycles of nature that if left to its own devises extinguishes the farmers need for pesticides and other harmful chemicals. Salatin could be seen as the conductor while all the other organisms of the farm are the musicians and the instruments; he sees how nature works and makes sure all the conditions are perfect and helps nature along. With his many inventions and quirky optimistic attitude one can’t help but picture a cartoon character. Several times throughout the reading I was reminded of the industrial revolution; and not just because the industrial food chain was born out of it. I found it interesting how the industrial food chain resembled the industrial revolution in conditions only. It was bleak, mechanical, and the conditions the animals are kept in are just horrible and unsanitary. The mass wave of human innovation and change that came out of the industrial revolution is absent from that food system but are absolutely present at polyface. Obviously this is just one farm so the analogy might be weak but I feel the conditions of this one farm, if recreated and multiplied, could produce some amazing ideas and inspire positive change.

How to Perform the Dancing Gummi Bear Demonstration

Place a Gummi Bear candy into a test tube containing potassium chlorate and watch it dance amidst purple flames. This stunning demonstration is an example of a strongly product-favored reaction, plus its a lot of fun. Its easy and takes no time at all. What You Need Gummi bear candyPotassium chlorateLarge test tubeRing standBunsen burner or other heat sourceTongs Here's How Set up a large test tube over a heat source, such as a bunsen burner. Add a small amount of potassium chlorate to the test tube and heat it until it melts. The exact amount isnt important... aim for a small scoop.Using long-handled tongs, drop a Gummi Bear candy into the test tube.Its just that simple! The reaction between the sucrose in the Gummi Bears, potassium chlorate, and oxygen produces carbon dioxide, water, and potassium chloride. Tips Use proper safety precautions, including safety goggles and a lab coat. Be advised, the reaction is vigorous enough that the test tube may shatter. Adult supervision is required.The Instant Fire demonstration is very similar to the Dancing Gummi Bear demo.Another way to do this demonstration is to set the Gummi Bear on top of cold potassium chlorate. When you are ready to start the reaction, it can be initiated by adding a couple of drops of sulfuric acid to the contents of the test tube.