BUS4098 Week 2

Accrual Accounting Statements

The accrual accounting system is the language of business. Through this system, you will be able to translate and

transmit large amounts of information about how �rms are performing. But sometimes, accrual accounting looks at

numbers differently than the way you would if you were talking to a nonbusiness friend. A concept that causes many

people trouble is cost. You often associate costs with what goes out of your pocket or bank account. But in accrual accounting, costs are only recognized in the income statement when goods are sold. If the goods are sitting in a

warehouse, then the cost of making those goods is not recognized.

This means that in the simulation, we may have an income statement that looks good in Year 11 for a �rm that actually

had a lot of unsold shoes. All the costs that are tied up in the shoes sitting in the warehouse do not appear in the income

statement. Therefore, although revenues are much smaller than expected, when recognized costs are taken out, the �rm

appears to be making a healthy pro�t.

However, when you look at the �rm's cash �ow, "healthy" may not be the term you would use to describe the �rm's

pro�ts. Accrual accounting may not have recognized the costs, but the bills still have to be paid. Therefore, a �rm that

shows a healthy pro�t may not have cash to pay any remaining bills. The �rm may need to go to the bank and get a high-

interest short-term loan to tide it over. If managers only look at their accrual accounting results, they may not realize the

shortage of funds until it is too late.

Additional Materials

View a Pdf Transcript of Accrual Accounting Statements  (media/week2/SUO_BUS4098%20Supplemental%20PDF%20for%20W2%20Accrual%20Accounting%20Statements.pdf?

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