‘‘The accountant’s problem is essentially one of reconciling cash receipts with revenues and cash disbursements with expenses. That is, for every revenue recognized but not received in cash during the current period, an asset of equal value must be recorded (or a liability must be amortized); for every expense recognized but not paid in cash in the current period, a liability of equal value must be recognized but not paid in cash in the current period, a liability of equal value must be recognized (or an asset must be amortized).’’
Required
a. Income determination is an exact science. Comment.
b. Cash flow must be estimated. Comment.
c. In the long run, cash receipts from operations is equal to revenue from operations. Comment.
d. Assume that a firm has a negative cash flow from operations in the short run. How could this negative cash flow from operations be compensated for in the short run? Discuss.
e. Assume that the reported operating income has been substantially more than the cash flow from operations for the past two years. Comment on what will need to happen to future cash flow from operations in order for the past reported income to hold up.