If you are new to financial accounting, net income and gross income are two terms that you must understand. Both of them are crucial in presenting the profitability of a business. As a business owner, you need to know the correct ways of calculating them so that you get to analyse the exact financial position of your company. If the accounting tasks are too time-consuming and you cannot afford to hire an in-house full-time accountant (Also see How Do the Accountants Reconcile the Accounts?), why don’t consider engaging an accounting firm in Singapore? The professionals will be able to keep your books of account always updated and ensures the accuracy of your accounting (Also see Do You Know What Are Accounting Controls?) records without costing you much.

Firstly, let us look at what do net income and gross income mean. Net income is the sum of money remaining after the deduction of all the expenses incurred in the company from the gross income. This portion is the amount of the company’s earnings. On the contrary, gross income is the income (Also see Importance of Statement of Comprehensive Income) of the business after the company subtracts the cost of goods sold from the revenue generated.

In other words, if we want to calculate net income, we need to deduct all the operations, administration and management expenses from the gross income generated. If we’re going to calculate gross income, we should deduct the cost of goods sold from the company’s net sales. Thus, from here, we get to know that the amount of gross income will always be higher than that of the net income.

When you look at the profit and loss statement of your company, the first item that appears on it is the gross sales. To calculate gross sales, you need to multiply the number of products sold with the price per unit of the products. Then, if there is any sales returns or sales discount and you subtract them from the gross sales, you will get the net sales.

After calculating the net sales, you should subtract the cost of goods sold from it, and this will result in the gross income. We will be able to tell the amount close to the exact sum of money the company has earned by looking at this sum. Next, to calculate the operating income (Also see What Can You Find in an Income Statement?) of your business, you need to subtract all operating expenses incurred from the gross income. Deducting the taxes and interest expenses from the operating income will result in the net income.

Net income plays a crucial role in telling the financial position of a business as it shows the amount of money the company has for it to pay a dividend to its shareholders or to reinvest those sums back into the business. On the other hand, we get to know the amount of money a company has earned after deducting the cost of goods sold from its net sales by looking at its gross income. Thus, both net income and gross income of a business are vital if one intends to understand the financial performance of the company.

When it comes to the preparation of financial statements, one will need to master a lot of skills and methods required to generate those statements accurately. This is why some of the business owners prefer hiring an accounting firm in Singapore to get this done rather than completing this task on their own. Among the crucial financial statements, the cash flow statement is the one that people require so that they get to know the sum of cash that goes into and out of the company.

In the cash flow statement, there are three types of cash flow activities, which are the operating activities, investing activities and financing activities. Usually, the accountants will calculate the amount of cash flow for investing activities and financing activities by using similar methods. However, in the case of the calculation for operating activities, there are two methods that they can use, which are the direct method and the indirect method.

If one uses the direct method, he should record all the changes in cash receipts and payments under the section of cash flow from operating activities in the statement. If he prefers using the indirect method, he needs to adjust the changes in the company’s assets and liabilities in its net income when calculating the sum of cash flow from operating activities.

The direct method only includes cash transactions to generate a cash flow statement. In other words, it only takes the cash receipts and cash payments into account. Typically, the direct method shows the gross cash receipts and cash payments of specific line items. Some examples include the cash that the company has received from its customers, paid to the suppliers for the goods and services bought, as well as cash payments to the employees. Other receipts or payments include the interests and taxes paid, and other cash received or paid.

On the other hand, the indirect method takes the company’s net income as a base before adding the non-cash expenses incurred and deducting all non-cash incomes from it. The former may include depreciation and amortisation expense, while an example for the latter is the sale of scraps. Also, he needs to make some adjustments before producing the cash flow statement.

In conclusion, both the direct method and indirect method for the preparation of cash flow from operating activities have their own advantages and disadvantages. Business owners or the accountants (Also see How Do the Accountants Reconcile the Accounts?) may decide the method they want to use based on their needs and situation.

Choosing a suitable business entity for a new company is something that every business owner must have gone through. Before they can choose the form, which works the best for them, they must do some research about the pros and cons of each or get assistance from a company secretarial service in Singapore. Among the different types of business entities, let us now have a look at the advantages and disadvantages of setting up a partnership.

The owners of partnerships can enjoy some of the benefits that this business entity brings them. From a legal perspective, the business affairs of all the partners remain private, and they need to follow fewer external regulation. Besides, if the business continues to grow, and the structure of a partnership can no longer cater for the demand, it is easier for the owners to alter the business structure.

People can set up partnerships easily with low start-up cost. As partnerships have several owners, it increases the number of inputs, and thus, the business will have more capital for its operation. This makes partnerships to have larger borrowing capacity than sole proprietorships. Apart from that, the partners may get some advantages from income splitting, and this may bring significant tax (Also see Do You Need a Tax Accountant?) savings for them.

Establishing a business in the form of a partnership also means that the owners will be able to work with each other so that they can create ideas that help to boost the efficiency of their business. Also, they can make skilful employees be their partner. This will enable them to come up with more amazing ideas and hence increase the revenue (Also see How to Differentiate Revenue and Income?) of the business.

Everything has their downsides, and partnerships are no exception. One of the most notable disadvantages is that if the partnership is not established as a limited liability partnership (LLP), the partners will have unlimited liability on the debts and other liabilities (Also see Equity and Liabilities) of the business. All the partners are entirely liable for the partnership’s debts, which means that they have to be responsible for paying the debts of their share.

Besides, in most cases, partnerships are tenuous in terms of interpersonal relationships as there will be a high risk of friction and disagreement between the management and the partners.  The partnership (Also see How Can You End a Partnership?) will face some issues if the partners cannot collaborate well. Also, as every partner serves as one of the essential elements in a partnership, every one of them is liable to the decisions and actions that other partners have made or taken. In some occasions, the partners may have to suffer from the consequences of some mistakes made by other partners even though they have not made any mistake.

Do you know that there are three different classes of cash flow activities? One of them is the cash flow from financing activities. These activities are the cash inflow and outflow arising from the company’s financing activities. Some examples of such activities include a change in capital that arise from the issuance of securities and debentures. These activities also include the payment of short-term or long-term liabilities (Also see Can You Differentiate Debt and Liability?), interests on securities, as well as payment of dividends.

When the accountants from an accounting firm in Johor Bahru is preparing the cash flow statement, they will place the cash flow from financing activities as the last of the three types of cash flow activities (Also see Types of Cash Flow Activities – Cash Flow from Investing Activities). These activities include cash inflows generated by the activities for the company to obtain funds, as well as the cash outflows generated when the company is paying for such funds.

The financing activities that cause cash inflows include the increase in short-term and long-term borrowings, as well as the sale of the company’s shares. On the other hand, cash outflow can be caused by a drop in the short-term loans that the company has obtained, or when the company is paying for its long-term borrowings. If the company pays cash dividends to its shareholders or it buys back its shares, then there will be an outflow of cash arising from financing activities.

If a company always have positive cash flow, we may assume that the business is operating (Also see Types of Cash Flow Activities – Cash Flow from Operating Activities) in a safe zone. When the cash that the company has generated is more than that of it has spent, the excess will result in the payments of dividends, a decrease in the company’s liabilities, the repurchase of stocks, and so on. People will consider these as good signs that help in creating good shareholder value. 

In the early days, people used to focus on the company’s balance sheet and profit and loss statement when they want to assess the company’s situation. However, as time passes by, they started studying both the statement with the company’s statement of cash flow. In fact, this helps them to get a clear picture of the financials (Also see What is a Financial Statement Review?) of the business before they make any decisions. This can be proved by the points that we have discussed above, that is, by looking at the statement of cash flow, we will be able to know the company’s main financing activities in the section of cash flow from financing activities.

In short, cash flows from financing activities are the cash flows that arise from the repurchase and issuance of the stocks and bonds of the company as well as dividend payment. These transactions are related to the company’s capital, and they will appear in the company’s balance sheet under the section of long-term capital.

Cash flow from investing activities appears as the second part of the cash flow statement. It reflects the inflows and outflows of cash arising from the investing activities that have taken place in a company. Cash flows that are related to the investments of tangible and intangible assets, asset procurement, the purchase of property, plant and equipment or shares, earnings from the sale or disposal of assets, and so on, are all in the category of cash flow from investing activities.

Apart from investing activities, the other two types of cash flow activities include operating activities and financing activities. Classifying business activities into the right category may not be an easy task for business owners who do not know accounting well. If you are one of them, feel free to contact an accounting firm in Johor Bahru if you need assistance on this matter.

Cash flow from investing activities takes into account all business transactions that are related to the sale and acquisition of plant, property and equipment. In the company’s balance sheet, one will be able to find these items in the non-current parts. Investing activities that will lead to cash inflow are the sales and disposals of property, plant and equipment. On the other hand, the activities that will bring about a cash outflow include the property, plant and equipment procurement, investments made in joint ventures or the acquisition of a business, as well as the payments for the investment in the marketable securities.

As an example, XYZ Corporation is a newly incorporated firm. In the first month after it started running the business, it did not earn any revenue, and there is not related operating expense. Also, it did not get involved in any investing activities. Hence, its cash flow from investing activities will be zero too. Then, in the second month, it has invested in a property worth RM200,000. In this transaction, the business needs to spend cash. Thus, this is an example of cash outflow for investing activities.

By studying the cash flow from investing activities, one will get to know the trend of the capital expenditures of a company. Thus, he can determine whether the company’s current condition and stage, whether it is growing rapidly or in a stable phase. Knowing this will be very helpful when we want to forecast the company’s financial statements and its performance in the future. Besides, another aspect that one may focus on is the earnings that the company has obtained from the disposal of fixed assets. If the earnings from the disposal are abnormally high, one may need to study why the business has disposed of those assets.

In short, cash flow from investing activities includes the sales and purchases of property, plant and equipment, as well as the investments made. By studying this section in the statement of cash flow, one will be able to know the primary investing activities that the company has carried out. If one intends to assess the financial position of a business, besides looking at the statement of cash flow, he should study the balance sheet and profit and loss statement as well.

Among the three different types of cash flow activities, cash flow from operating activities is the first part of an income statement. It presents the cash inflows and cash outflows of the business that arise from its operating activities. The cash flow from these activities includes the amount of money the business has received from its sales, as well as the expenses that the company has paid for various costs. The accounting (Also see An Overview of Accounting Procedures) records related to these business transactions are quite complicated and time-consuming to handle, particularly if your company has a large transaction volume. Thus, you may consider hiring an accounting firm in Johor Bahru to let the professionals help you out.

Cash flow from operating activities focuses on the inflows and outflows of cash arising from the primary business operations of the company. Hence business owners get to know the amount of cash their business has spent on the production and the cash the company has generated from the sales of its goods and services. By studying the operating activities section, one will be able to know the changes that have taken place in cash, depreciation, accounts payable, accounts receivables, inventories and so on.

Most financial analysts will focus on the cash flow from operating activities as this indicates the company’s ability to conduct the business operations successfully. For the business to remain solvent, business owners need to make sure that the company’s cash flow from operating activities remains positive. This means that they should ensure that operating activities that the business has carried out must generate positive cash flows.

The accountants may use two different methods to calculate the company’s cash flow, which is the direct method and the indirect method. If an accountant chooses to use the direct method, he needs to extract information regarding various cash receipts and payments from the company’s income statement. This includes the amounts that the company has paid to its suppliers and employees, as well as the cash that it has received from its customers. Then, the net of cash receipts and cash payment will be the company’s operating cash flow.

On the other hand, if the accountant prefers using the indirect method, he should take the company’s net income from its income statement. As most companies would prepare their financial statements by using the accrual basis, they will recognise their revenue (Also see How to Differentiate Revenue and Income?) when they have earned it, but not when they receive it. Thus, net income (Also see The Difference Between Net Income and Operating Income) will not be able to reflect the cash flow related to their operating activities. Therefore, the accountant should adjust the company’s earnings before taxes for the items that bring an impact on the net income (Also see Mistakes To Avoid When Filing Self-employed Income) of the company even though there is no cash receipts or payments for that transaction. Besides, by using the indirect method, the accountant needs to add back the cash flow from non-operating activities as the cash flow related to these activities will not influence the operating cash flow of the business.

In short, cash flow from operating activities plays a role as a crucial indicator of the company’s core operations. By studying this, the investors will be able to analyse the company’s operations so that they can determine whether the core business activities of the company are generating income for the business.