Accounting This Discussion Contains Research Pertaining to Term Paper

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Accounting

This discussion contains research pertaining to the impact of cash-basis accounting on the distortion of the financial position and operating results of a business.

We began our discussion with a definition of cash base analysis. We concluded that this accounting tactic is used to examine cash and cash equivalents. This is done by separating cash flow transaction into one of three activities which include; operating, financing and investing activities.

Our investigation then explored why and how financial statements completed using cash-basis accounting can be distorted to present a misleading picture about the financial position and operating results of a company. Our investigation found that these distortions exist when accountants fail to provide a report of additional information that may not appear on the face of the financial statement. Additionally, we found that inconsistencies in the presentation of a financial statement can greatly influence the distortion of information that is found in the statement,

Introduction

Efficient accounting practices are essential to the success of any business. In recent years the accounting profession has come under great scrutiny for the use of questionable accounting methods. One method that has come into question is cash basis accounting. The purpose of this discussion is to examine whether financial statements prepared on a cash basis of accounting may distort the portrayal of financial position and operating results of a business.

According to a report published by the International Federation of Accountants, cash basis accounting is defined as, basis of accounting that recognizes transactions and other events when cash is received or paid. It measures financial results for a period as the difference between cash received and cash paid. The primary financial statement is the cash flow statement.

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" (Financial Reporting under the Cash Basis of Accounting, 2000)

The report explains that the cash flow statement allows viewers to examine the sources pf cash that were raised and used throughout the period and the balance of cash and cash equivalents. (Financial Reporting under the Cash Basis of Accounting, 2000)

Arguments

In some cases the cash basis of accounting can distort the portrayal of financial position and operating results of a business depending on how the financial statements are prepared and presented. The purpose of financial statements is to illustrate to the investor the means by which the business generates cash. (Financial Reporting under the Cash Basis of Accounting, 2000)

The financial statements are designed to demonstrate the amount of capitol needed to conduct and sustain business.

The portrayal of financial position and operating results can be misconstrued when accountants use legal but immoral tactics while reporting the sources and the uses of cash in the business. One such tactic involves a firm's failure to report detailed additional information that does not appear on the face of the financial statement but is relevant to explaining the cash flows of the business. (Financial Reporting under the Cash Basis of Accounting, 2000)

The cash basis of accounting may distort the portrayal of financial position and operating results of a business when firms that use it fail to perform several tasks. According to the report these tasks include; the failure to faithfully represent the cash flows of the entity, failure to remain free from bias, and failure to complete the report in all material….....

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