Any time a company spends more than it receives, it experiences a negative cash flow. This is seen as financially ill by potential investors. Any negative cash flow should never be seen as a failure, because it could have been caused by a mismatch of expenditure and income. However, a negative cash flow is not a sustainable business model as lack of cash can lead to bankruptcy of a company due to expenses and economic changes.
Financial Accounting Standards Board established the Generally Accepted Accounting Principle or GAAP. Use of GAAP method has serious impacts on the cash flow statement in issues relating to investing and financing. The method has specific guidelines for revenue recognition. United Sates Securities and Exchange Commission stated that revenue recognition is a difficult and problematic process due to the abuses that have been occurring in it. Cash flow statement consists of operating, investing and financing activities. GAAP is the only accounting policy that does not report dividends in the income statement as an expense. There are cases where interest expense can be recorded as operating or investing activity, GAAP limits income expenses as operating activity only. These facts show that GAAP is only rule-based in interpreting the performance of the company. Principle-based accounting systems give investors a better view on transactions as their reports are based on reality. This locks GAAP out of the picture.
Auditors reviewed and established the cash flow issues of the Indianapolis Head Company and Manufacturer of lithium-ion battery EnerDel. It was found that company encountered losses that were tied to the bankruptcy of the electric car maker Think Global. It’s important to note that the taking a risk of venturing into business and solely relying on distributing one’s product to only one company can cause unforeseen damage to the company, its workers, shareholders and economy at large. EnerDel’s state of running into bankruptcy was underway due to the fall of Think Global Company.
Shrink and waste is a theory where there is loss of products between point of purchase or manufacturer to the point of sale. This relates to the margin of profit. Large amount of shrink and waste leads to decrease in profit margin. This can damage the inventory or affect the consumers due to increased costs by the seller in order to mitigate the losses. One should know the expected inventory and the actual amount of inventory in the stock in order to calculate shrinkage. Inclusion of shrink inventory affects the profit margin of the company.