The end-of-year parties at Yearling, Inc., are known for their extravagance. Management provides the best food and entertainment to thank the employees for their hard work.  During the planning for this year’s bash, a disagreement broke out between the treasurer’s staff and the controller’s staff. The treasurer’s staff contended that the firm was running low on cash and might have trouble paying its bills over the coming months; they requested that cuts be made to the budget for the party. The controller’s staff believed that any cuts were unwarranted, as the firm continued to be very profitable. Can both sides be correct?  Explain your answer.

 

Answer:

Yes. There is a major difference in perspectives between the firm’s treasurer’s staff (Finance) and controller’s staff (Accounting) as the functions performed are different. Accounting generally use the accrual method where revenues and expenses are recorded in the absence of cash transaction, it gives a more realistic idea of income and expenses, providing a long-term picture of the business. However, it doesn’t provide any awareness of cash flow, it can appear to be very profitable while in reality it has an empty bank account. Meanwhile, finance focus on the cash flows where it only recognizes revenues when cash is received, and expenses when they are paid. This method allows to track how much cash the business actually has at any given time.