The Cash Method of Accounting
Many small businesses operate on a cash accounting basis. They simply keep track of cash received and cash paid out. This is known as the cash method of accounting. Under this method it can sometimes be difficult to match expenses with their associated revenues. For example, if a company purchases inventory in one year and sells it in the next, the expense will be reported in year one while the revenue will be reported in year two.
Publicly traded companies are not permitted to use the cash method under either U.S. GAAP or International Accounting Standards. However, they must present a statement of cash flows under both standards. The cash flow statement allows investors and others to compare accruals with the timing of cash flows.
For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Securities Regulation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
