This post addresses the income statement & cash transactions
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The following areas could be deceiving parts of the income statement:
1) Revenues
2) General Expenses
3) Depreciation Expense
Think of reasons why the above three items might be recorded on the income statement, but possibly no cash transactions.
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Solution Summary
The solution discusses why the areas of revenues, general expenses, and depreciation expense can be deceiving parts of the income statement, and why there could be no cash transactions.
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In the same area, companies trying to purposely overstate their income make things even more of a mess by violating GAAP in the way they record the transactions.
With revenues, companies must realize revenue in order for it to be recorded and considered legitimate. If they are prepaid for orders, the company must record the amount as unearned revenue, which is a current liability. However, if the company is trying to state a certain income by the end of the accounting period, they may recognize revenue early (against accounting principles, including GAAP). Even if the company does record transactions in compliance with accounting principles, revenue has nothing to do with cash that's been collected. The company could have $600,000 in revenue for the accounting period. They haven't collected $600,000 from sales, it merely means that they have recognized that amount as revenue, and it has ...
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