In 2016 a major revision of the accounting requirements for leases is set to have a significant impact on huge swathes of industries doing business internationally who rely on leasing assets as a way of doing business. International Accounting Standards Board (IASB) now requires that all leases be reported on balance sheet as assets and liabilities. Generally Accepted Accounting Principles (GAAP) does not have the same requirement.
Most people are aware of loss contingencies, where a company writes down a portion of an asset when there is a likelihood that a loss will occur. Some companies have insurance policies to protect from loss, others take the write down. A loss contingency is used is to account for invoices that may not be collectible. You can see this pretty regularly as an Allowance for Bad Debt. The loss hasn’t occurred yet, but history shows that it is likely.
I’m often asked about the two different ways of preparing cash flow statements. They are methods. Just methods. We all have our favorite way of doing things and they work for our purposes. Sometimes we can’t even explain why we use one technique over another. The best answer we can muster is, “that’s the way I was trained”. In accounting, as long as we adhere to the guiding principles, most every method has a reasonable explanation. Preparing a statement of cash flow for a company is no different.
But there has to be a reason why nearly all companies use the indirect method versus the direct method.
There is – and the answer isn’t that interesting. It’s just easier. So let’s discuss what the primary differences are so you can come to your own conclusion about which method you prefer...
It’s interesting how over the years, companies make adjustments to the rules that always seem to work in their favor. Generally, the reporting transactions are accurate and legal, but may paint a different picture of the financial health of the company. As a lender or trusted advisor, it’s important to understand the shortcomings of the reporting system. This understanding is key to maintaining awareness of important issues that impact how cash flows through a company. Let’s look at a few problems within the three main sections of the cash flow statement. Cash generated from:
3) Financing activities
As a result of Finagraph’s banking and business owner seminars, I occasionally get asked to step in as a consultant to help small businesses. The most common challenge they seek help with is retirement planning. Their question – “I want to retire, but don’t know where to start.” It’s natural to be apprehensive when your life is about to make a dramatic change, but thinking about it early and taking the right steps can ease your fear.
We preach that a successful business owner starts with the end in mind. After a seminar in Las Vegas last fall, I was approached by a couple who own a professional services firm in Los Angeles. They were in this exact situation – looking to retire, and hoping to transition ownership of their firm to their son. The business is 30 years old, and the son has been with the firm for the past 11 years. It’s a profitable company with a niche service, ripe for growth or sale.
I often get asked about goodwill – its importance as well as how to value it. It’s complex. Goodwill is intangible. Hard to quantify but an important asset none the less.
Goodwill is defined as the amount of money someone is willing to pay for a company over and above the value of the assets within the company. The company’s book value is the equity within the company as listed on the balance sheet. Any money paid above the book value is considered goodwill. It’s the difference between cash received during the purchase and the actual value of the company.
I’ve been spending the week at the Graduate School of Banking at Louisiana State University, teaching bankers about small businesses. I’m sporting my purple shirt and spent some time visiting world-famous Mike, LSU’s mascot.
It’s been a great week. I love sharing what I learned running my own businesses and also helping others run theirs. It’s gratifying helping bankers understand the small business mindset. In return, I always glean learnings from the bankers’ insights.
I love being on the front end of a movement. In its second year, the Canadian Accounting Technology Show (CAT) currently in Toronto holds great promise for the future of Canadian accounting firms. While the attendance is a little lighter than expected, the thirst for information is pervasive. Accountants are engaging with world-class vendors like Intuit, Sage, Wolters Kluwer, and Thompson Reuters.
I love incorporating business principles almost as much as I love using technology. They both have played a big role in my business success. As a small business consultant, I’m often asked the best way to estimate the value of inventory. One method is based on gross profit. Warning – this post does come with a quiz at the end.
The gross profit method of valuing inventory is a technique using a company’s historical or projected gross profit margin to estimate cost of goods sold during a period. The gross profit method assumes the gross profit ratio remains stable during the period.
“Nobody asked you. Nobody told you. Nobody stopped you. You just did it.” At a recent event, I was engaged in a conversation about small business ownership with a good friend of mine, Nancy from Moody’s Analytics. We were discussing the trials and tribulations of small business ownership when she made the above statement. So short, so simple, and so powerful all at once.