BUS4098 Week 2

Accrual Accounting Statements

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Business Simulation

©2016 South University

2 [Document Title]

[Parent Lecture Name]

Accrual Accounting Statements

One of the odd things about the accrual system is that it will have just the opposite effect in the year in which the inventory levels drop. At that time, all the accrued costs are finally recognized, but of course, there are no corresponding bills to be paid because they were paid in an earlier year. Therefore, although those accrued costs lower the net income and the firm's apparent performance, consider what happens to its cash position. The costs are not real, but the revenues are real. Therefore, the cash flow of the firm becomes very healthy in the year the accounting system shows high costs.

As so many financial metrics, using which firms are evaluated, come from accrual accounting measures, you have to be very careful about the conclusions you draw from them. The trap described above is just one of many that accrual rules set out for unaware managers. Keeping in mind what accrual accounting does and does not represent is the key to making good translation from the language of business.