So far in the book we have been discussing financial statements prepared using accrual accounting, which recognizes revenues when they are earned and then tries to match the related costs to the revenues. Where the costs cannot be matched, they are included in the period in which the costs are incurred. Unfortunately, matching costs and revenues requires numerous estimates and assumptions and is subject to much debate and interpretation.
There is another, simpler, way to prepare accounting statements. All transactions can be measured in terms of cash flows into a corporation and cash flows out of a corporation. Imagine a firm has only one asset: cash. Revenues occur when cash increases, and expenses occur when cash decreases. ...
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