| Learning Team B Reflection Week 5| University of Phoenix| ACC 291| Team B-Leisa Byrd| | | The fourth and fifth week objectives covered the direct and indirect methods of preparing cash flow statements. The direct method is used for tax reporting purposes for company operations, whereas the indirect method is using a company’s net income and is more accrual based by adding and deducting from the cash flow (Weygandt, Kimmel & Kieso, 2010).
The team also learned about vertical and horizontal analysis in which goes over reviewing line items on any given financial statement for investment decisions (horizontal), and reviewing the three primary sections on a balance sheet; assets, equities and liabilities. We also read about internal controls to prevent fraud, Sarbanes-Oxley Act and how it defines unethical practices and reporting on financial statements. There are two methods in preparing a statement of cash flow: indirect and direct methods.
Indirect methods adjust net income for items that do not affect cash (Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. 2010). Direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash flows (Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. 2010). With the indirect methods, you take the net income and add or subtract the adjustments to get the net cash provided. The horizontal analysis evaluates a series of financial statement data over a period of time and is primarily used in the intra-company basis.
The vertical analysis evaluates financial statement data be expressing each item in a financial statement as a percent of a base amount and is primarily used in both intra-company and inter-company basis. The ratio analysis expresses the relationship among selected items of financial statement data (Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. 2010). Common stock and preferred stock are important to journalize because they signify where the paid-in capital is coming into the company.
Common stock and preferred stock need to be journalized differently as they represent two different types of paid in capital. Common and preferred stock are often issued for cash or non-cash assets so the journalizing of the issuance helps to track the financial statements. The declaration of dividends benefits the companies by encouraging investors to supply the company financially. There are a lot of things that companies can do that would be considered unethical when it comes to accounting. This would include misuse of funds, overstating revenue, and misleading financial analysis for some sort of personal gain.
Some of the other unethical things would be fraud, kickbacks, manipulation of the financial market and even insider trading. The two companies for example that had unethical practices would be Enron and WorldCom. With these two companies is when the Sarbanes-Oxley Act became. This act is to help catch fraud, unethical acts, and even detect any possible errors. The Sarbanes-Oxley Act says that a company has to keep documentation to any financial controls of their business. References Weygandt, J. J. , Kimmel, P. D. , & Kieso, D. E. (2010). Financial Accounting (7th ed. ). Hoboken, NJ: John Wiley & Sons.