The Economic Resources Approach to Accounting (ERAA)

05-Feb, Michael M Lee

Traditional accounting embraces the entity concept, which is good for explaining debits & credits, and what the entity owns and owes. But as businesses evolve, sustainability of cash and cashflows becomes vital, while the emphasis on entity and its going concern assumption remains important. Without cash and cashflows there is no entity, let alone going concern! Most companies painfully experience this situation during the current world-wide pandemic! Cash is the most vital economic resource for an entity‘s survival and so my proposed new concept and approach is called “The Economic Resources Approach to Accounting” (ERAA), shifting the focus from Entity to Economic Resources. The business owner, the Board and Management’s main interest is on how the economic resources of the company are acquired, allocated/deployed, profitably utilised, and redeployed. The current set of financial statements do not reflect this economic cycle clearly. For centuries, Accounting has been entrapped by the Entity focus, losing sight of the greater importance of Economic Resources. My article on ERAA (as attached) highlights this issue and proposes solutions. Professional awakening, recognition, and full awareness of this issue are necessary for a focussed action towards ERAA, internationally. Otherwise, business managers remain at best, inadequately enlightened, or at worst, consistently unenlightened in still fully embracing the Entity Approach to Accounting!

Cashflow Statement – Period & Trend Analysis

29-Jun, Michael M Lee

Cashflow Statement – Period & Trend Analysis This is follow-on paper of my earlier paper dtd 26 April 2020 on “Cashflow Statement (CFS) – An enhanced presentation”. In this paper, which is geared towards the business leaders’ perspective, I shall discuss 1) Why a company’s sustainability of cashflow is important 2) The current CFS presentation allowing for different treatment of certain items 3) The traditional way of analysing Period CFS, and a proposal for a robust approach 4) Trend CFS analysis, leading to the determination of the company’s cashflow sustainability, and how the finance leader needs to be involved in strategic thinking process to assess whether investment activities are appropriate for maintenance or corporate growth per strategic plan. The business community needs to know that cashflow sustainability of a company is a necessary but not sufficient condition for the company’s overall financial health. The company also needs to grow its operating resources to further validate its going concern assumption.

Cashflow Statement – An Enhanced Presentation

26-Apr, Michael M Lee

The Cashflow Statement is the most important period statement as it depicts the cashflow health of the company. In its current presentation format, it may not be as useful as it should be, especially for non-accounting trained users who may be Board directors, Senior Management, shareholders or investors. These business readers/users are interested to know:. a) Why P&L Profit after tax (PAT)is not all cash?, b) What is the fully cash PAT?, c) What cause an adverse Cashflow Gap between P&L PAT and fully cash PAT and how can it be fixed?, d) Is the company’s going concern assumption threatened as a consequence of a huge negative Cashflow Gap? Unfortunately, the current presentation format does not highlight these areas simply because the focus is not on the PAT Cashflow Gap!

Financial Statement Analysis – The VISA Approach (Using both leading and lagging indicators) (Final Part 5)

31-Jan, Michael M Lee

Central to the V.I.S.A. Approach is the appreciation of the economic flows of transactions through the accounting system as depicted in the ERAA diagram. Then the key factors (V.I.S.A. components) in each of the financial statements, which pose potential risks to the financial health of the company must be recognised. Reviewing and analysing these key factors using both lagging and leading indicators on a regular basis (quarterly) and taking the appropriate actions to mitigate or forestall the risks will save the company from unintended corporate failure.

Financial Statement Analysis – What is V.I.S.A.? (Part 4)

31-Jan, Michael M Lee

In this penultimate part of my 5-part series on Financial Statement Analysis (moving from lagging to leading indicators), I shall discuss the areas in the financial statements (Balance Sheet, P&L Statement, and Cashflow Statement) in which accountants/CFOs and CEOs are seriously concerned about, agonising over the sustainability of the firm’s operational and financial performance. This is more so when the firm’s business or the economy heads south.

Financial Statement Analysis – Is there an optimal capital structure? (Part 3)

31-Jan, Michael M Lee

This is the 3rd accounting & finance article of my 5-Part Financial Statement Analysis (FSA) series. In this article, I shall discuss capital structure; its importance and implications to financial management and operational success. Much of the discussion will be centered on the practical aspects rather than its theoretical underpinnings (ie setting aside Modigliani & Miller Theorem and Robert Hamada’s Equation).

Financial Statement Analysis – Using leading indicators (Part 2)

31-Jan, Michael M Lee

This is the second of my 5-article series on the inadequacy of traditional financial statement analysis (FSA) in predicting, preventing and protecting business and financial risks of a company. The following 2 leading indicators are useful in managing such risks.

Financial Statement Analysis – Using lagging indicators (Part 1)

01-Jan, Michael M Lee

his article is the first of 5 parts which examine why traditional financial statement analysis (FSA) using ratios are lagging in the prediction, monitoring and control of the financial health of a company. It ends with how a systematic and integrated approach applying both lagging and leading indicators could proactively satisfy those objectives.

Financial Statement Analysis – Moving from lagging to leading indicators

15-Nov, Michael M Lee

Every accountant is expected to know how to perform a Financial Statement Analysis, which is key to understanding the financial health of any company. However, traditional financial statement analysis uses financial ratios which are based on historical (after-the fact) data. They produce an analysis which, at best, are lagging indicators of the financial health of a company.

“Debit and Credit” – Upon this Rock, the House of Accountancy was built!

14-Nov, Michael M Lee

While debits and credits appear basic and simple to the accountant, their explanation and determination are not. This paper provides the explanation and guidelines in treating the 2 legs of a transaction as debit or credit. I hope it now makes good sense in rationalizing what appears to be “mysterious” to non-accountants and accountants alike.

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