The accounting cycle is a collective process of identifying, analyzing, and recording accounting events. There are eight steps in the accounting cycle, recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements. These processes are guided by standards called generally accepted accounting principles, or GAAP.  There are two accounting methods, the accrual accounting method which allows a company to record revenue before receiving payment for goods or services sold, and record expenses as they are incurred. The cash basis of accounting records revenue when the goods and services are actually paid for.

Financial statements are developed to evaluate a company’s health. There are three main financial statements that must be considered, the income statement, balance sheet, and statement of cash flows. The cash flow statement paints a picture of how a company’s operations are running, where its money comes from, and how money is being spent. The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

There are two methods of calculating cash flow: the direct method and the indirect method. The indirect method is one of two accounting treatments used to generate a cash flow statement. The indirect method uses increases and decreases in balance sheet line items to modify the operating section of the cash flow statement from the accrual method to the cash method of accounting. The other option for completing a cash flow statement is the direct method, which lists actual cash inflows and outflows made during the reporting period. The indirect method is more commonly used in practice, especially among larger firms.

There are two accounting methods, the accrual accounting method which allows a company to record revenue before receiving payment for goods or services sold, and record expenses as they are incurred. Accrual accounting is usually compared to the cash basis of accounting, which records revenue when the goods and services are actually paid for.

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