FOREX Magazine

Expenses can include
everything from salaries and
benefits, to meals, bank fees
and cost of goods sold. Errors
in calculating operating
expenses can lead a business
to overspend, since these
figures are also used to set
future budgets.
Sometimes, a company will
use a previous quarter’s
figures when ordering new
items, based on the cost of
goods sold listed for that
quarter. An error in this area
could lead a business to
order inadequate inventory
to handle the upcoming
quarter’s demand.
Cash Flow Statements
As with balance sheets and
income statements, errors on
cash flow statements can
severely hamper a business’
picture of its financial
situation. Misclassification
can be a common area,
since it can be easy to
confuse items like cash and
cash equivalents (i.e. assets
readily convertible to cash).
Cash flows are usually
divided into three major
areas: operating activities,
investing activities and
financing
activities.
Businesses must know which
items go into which
categories.
Operating activity cash flows
are generated through the
company’s core business,
while investing activity flows
come from money spent on
the business or buying and
selling investments. Cash
flows from financing activities
include items specific to a
business and its creditors,
such as taking out or
repaying a loan.
According to the Securities
Exchange Commission (SEC),
cash flow mistakes are
common enough to cause
concern. Since investors
place emphasis on cash flow
statements when making
decisions, the agency
emphasizes the importance
of making sure this
information is 100% accurate.
The SEC says many of the
errors are basic accounting
mistakes, such as failing to
account correctly for capital
expenditures purchased on
credit.
It’s important that businesses
know the difference
between operational,
investment and financing
cash flow, and they must
classify these flows
appropriately.
Financial statements often
serve as the backbone of a
company, guiding its owners
as they make major decisions
or seek business partnerships.
When errors are made, it can
impact the business’ ability to
stay competitive or win
funding, among many other
issues. By putting measures in
place to prevent even the
smallest errors, a business can
protect its bottom line and
ensure it has the most
accurate financial picture
available.
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