CASH MOVEMENTS AND PERIODIC INCOME DETERMINATION
"The estimating of income, under conditions of uncertainty as well as of certainty, requires that the accountant trace carefully the relation between income flows and cash movements." "While it is true that there may not be an equality between the amount of revenue and the amount of cash receipts for any period less than the duration of enterprise existence, receipts are the elements with which we construct all measures of revenue. A dollar is received at some time during the life of the enterprise for each dollar of revenue exhibited during the fiscal period. The sum of the annual revenues for all fiscal periods is equal to the amount of ultimate total revenue.
There may be no equality between the amount of expense and the amount of cash disbursements for the fiscal period and yet the two sums are equal for the life of the enterprise. A dollar is disbursed at some time during the enterprise existence for each dollar exhibited as expense of the fiscal period."*
"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.