FINANCIAL ACCOUNTING & REPORTING

Financial Accounting & Reporting



Financial Accounting & Reporting

Introduction

DAS plc provides aircraft maintenance services. About 50% of its turnover and 60% of its operating profit are generated from its contract with a large national carrier, English Airways. This report analyse cash flows and profit of the company along with the ratio analysis with respect to comparison with the industry average. On the basis of the analysis, the report concludes with the advice the client whether they should hold their shares, sells them or increases their shareholding to 25%. An increase to 25% would give them significant influence over the operating and financial policies of DAS.

Difference between Cash Flows and Profit

Anyone who's interested in bookkeeping and accountancy needs to develop a familiarity with the terms that they employ. Two of these terms are “cash flow” and “profits.” The two might seem to be the same thing, after all, the more profits you make the more cash you have, right? In actual fact they are not quite the same, and the difference between the two is important when it comes to running a business or a household. Profits obviously refer to the amount of money you make over and above your expenses (Higgins, 2004, 56). Profits can be calculated on a weekly, monthly or yearly basis. Some of those profits might result from sales that are to be paid off over time.

If a business extends credit then it will not always receive cash immediately, either for goods or services. Similarly, the same business might make purchases or hire services and not be required to pay the full amount immediately. This is where cash flow comes in. Cash flow refers to whether you are getting enough money in this month to pay this month's expenses. The fact that you are due to receive payment for three months of work at the end of those three months does not help you pay your bills in the meantime (Titman et al, 2010, 87-90). One of the purposes of accountancy is to help business owners balance their cash flow. You need to bring in enough cash each month to meet those needs, and you need to be sure that you are not going to spend more money than you cannot afford for that month. If you are using an accounting software package to keep track of your finances then you should use it to generate a cash flow report, which will tell you how you stand in regards to your cash flow.

When analyzing the profitability of a company, is it better to use the cash flows or accounting profits? As in any business decision, there is a decision to make between two alternatives, which will necessarily involve a cost somewhere. Or sacrifice thoroughness and more accurate calculation towards greater speed and simplicity for making a decision, or decide to spend more resources in terms of time and money in a more detailed analysis to find a better basis for making a more accurate ...