Brandywine Income Statement Is as Follows: Brandywine

Brandywine Income Statement Is as Follows:

Brandywine Income Statement

Revenue

12,000,000

Expenses

9,000,000

Gross Profit

3,000,000

less

Depreciation Expense

Net Income

Brandywine's net income was $1.5 million. The total profit margin, which we will assume is the net margin, is 1.5 million / 12 million = 12.5%. The cash flow is $3,000,000. The cash flow is the net income + depreciation, so 1.5m + 1.5m = 3m.

If the depreciation expense doubled, the income statement would be as follows:

Brandywine Income Statement

Revenue

12,000,000

Expenses

Gross Profit

less

Depreciation Expense

Net Income

The net income would drop to zero, as would the profit margin. The cash flows, however, would remain unchanged at $3m. This is because the depreciation expense has doubled. In doing so, it is now $3m, and when this is subtracted from the gross profit, the remaining money (net income) is now zero. However, depreciation is not a cash flow. Therefore, a change in the depreciation expense does not have any impact on the cash flow. Only changes to cash items will impact cash flows. Thus, the cash flows still remain at $3 million.

4. Cash accounting is a system that only measures cash flows. All items are recorded when the cash flow occurs. Accrual accounting refers to a system that records transactions when they take place, regardless of when the cash changes hands (no author, 2011). These differences take a number of forms. Typically, accrual accounting conforms to generally accepted accounting principles (GAAP) while cash accounting does not. Thus, most businesses do not use cash accounting, perhaps with the exception of very small businesses.

One of the differences between the two methods is with respect to revenue recognition. As the definitions explain, revenue is recorded in cash accounting when the cash is received. Thus, if a sale is made in December and the account is settled in February, the transaction is not recorded until February. In accrual accounting, the same transaction would be recorded in December. This is because the transaction is recorded when it is accrued. To make this work, accrual accounting has two separate transactions to record that one sale. The first transaction would record a matching transaction to sales and to accounts receivable. When the account is settled, the accounts receivable transaction is matched with a cash transaction.

In accrual accounting, all accounts must have a matching and immediate transaction to balance. In cash accounting, this is not entirely necessary. As cash accounting systems are not subject to standards, the details may differ but in cash accounting it is reasonable that the sale is noted somewhere but the books are updated only when the cash for the sale is received. There is no accounts receivable account to note that a sale has been made but not paid for.

5. On the balance sheet, the equity section of a not-for-profit business differs from that of a for-profit business. In a for-profit business, the equity section combines with liabilities to match the assets. This is because of the matching principle in accrual accounting. For every asset that is acquired, there must be an offsetting transaction. Thus, the asset must be acquired via debt or equity. If the asset cash from a profitable transaction, that will be offset into the equity side, usually as retained earnings. If the asset is purchased on credit, that will be reflected on the liabilities side. Each side of the balance sheet must balance, reflecting a series of offsetting transactions. Equity is simply what results whenever an asset is acquired without the use of some form of debt. In this context, equity reflects shareholder wealth. The equity is the value of the firm (its assets) once its obligations (liabilities) have been paid off.