Financial Statement, Cash Flow, and Taxation

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Financial statements for a corporation have four distinct parts: the income

statement, the statement of cash flows, the balance sheet, and the statement of

owner’s equity (Reeve, Warren, & Duchac, 2011). The income statement shows

revenue, expenses, taxes, and the net income after taxes (Gitman, 2006; Block,

Hirt, & Danielsen, 2009). This statement shows the final profit of the

corporation. The statement of cash flows is divided into three sections: operations,

financing, and investing (Penson, 2004). The most significant of the three sections of

the cash flow statement is the operating cash flow because this shows the result of

sales minus expenses (Wahlen, Baginski, & Bradshaw, 2011). The balance sheet

contains the basic accounting equation: assets=liability + owner’s equity (Fridson &

Alvarez, 2002). The last part of the financial statement is the owner’s equity

statement, which shows the net value of the ownership interest in the corporation

(Reeve et al., 2011). Collectively, these four separate financial statements are

known as the financial statement. When published at the end of the year, it is known

as the annual statement. These financial statements are computed every month and

are usually published quarterly and annually.

Income cash flows are income computed after taxes, plus depreciation. These are

only positive cash flows if the income coming in exceeds the cost to produce that

income (Block et al., 2009). Expense cash flows are cash outflows that are normally

payments that have to be made to someone outside of the corporation (Gitman,

2006). If income cash flows (which are positive) exceed expense cash flows, then

the corporation is making a profit. Cash flow is one of the most important areas for

the financial manager of the corporation to oversee (Gitman, 2006; Block et al.,

2009). Effective cash flow management starts with the cash budget, which has four

major sections: receipts, disbursements, cash surplus or deficit, and the financing

section (Shim & Siegel, 1992; Dauber, Siegel, & Shim, 1996). The receipts section is

the starting cash balance, the incoming cash from customers and other receipts

(such as the repayment of a note owed to the corporation). The disbursement

section records all cash payment made by the corporation. The cash surplus or

deficit is the difference between cash receipts and cash disbursements. The financing

section lists all sums borrowed or repaid. The cash budget is set up to maintain a

minimum cash balance at the end of each month. If disbursements exceed receipts,

then money is borrowed to reach the cash balance minimum, and if receipts exceed

disbursements, then the amount borrowed in the past is repaid (Dauber et al.,

1996).

Taxes are the sums of money imposed by government on businesses (such as

corporations) to pay for the cost of government provided services and infrastructure.

The financial manager has to manage the tax liabilities of the corporation as closely

as any other aspect of the business. Tax liability is affected by revenues, expenses,

and deprecation (Gitman, 2006; Block et al., 2009). The amount of the final tax

owed by the corporation is not the result of random chance but is planned for in

Financial Statement, Cash Flow, and Taxation

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advance by the financial manager of the corporation. A working knowledge of the tax

system and tax preparation is essential for the financial management to be

successful.

References

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2009). Foundations of financial

management (13th ed.). New York. McGraw Hill Irwin.

Dauber, N. A., Siegel, J. G., & Shim, J. K. (1996). The vest-pocket CPA (2nd ed.).

Upper Saddle River, NJ: Prentice Hall.

Fridson, M. S., & Alvarez, F. (2002). Financial statement analysis workbook: Step

by-Step exercises and tests to help you master financial statement analysis (3rd ed.). Hoboken, NJ: Wiley & Sons.

Gitman, L. J. (2006). Principles of managerial finance (11th ed.). Boston: Addison

Wesley.

Penson, S. H. (2004). Financial statement analysis and security valuation (2nd ed.).

New York: McGraw-Hill/Irwin.

Reeve, J. M., Warren, C. S., & Duchac, J. (2011). Accounting using Excel for success. Mason, OH: Cengage/South-Western.

Shim, J. K., & Siegel, J. G. (1992). The vest-pocket CPA (2nd ed.). Upper Saddle

River, NJ: Prentice Hall.

Wahlen, J. M., Baginski, S. D., & Bradshaw, M. (2011). Financial reporting, financial

statement analysis, and valuation: A strategic perspective (6th ed.). Mason,

OH: Cengage/South-Western.