The activities of a business during a financial year combine investment projects in progress with new projects commencing and others terminate within the year. It would appear reasonable to presume, therefore, that business financial reports are presented in the cash-flow mode used to appraise investments, to facilitate comparison of actual with planned cash flows.
Some businesses do make such comparisons as part of their retrospective monitoring of investment decisions, but there is no obligation to do so. Cash-flow accounting, as it is called, has its supporters, but its introduction is frustrated by statutory and non-statutory regulations.
The Companies Act requires limited companies to produce profit and loss accounts and balance sheets in prescribed form. The Inland Revenue assumes that taxable profit has been computed by applying recognized accounting principles. The Accounting Standards Committee recommends the application of standard practices in the measurement of profit and portrayal of a company's financial position in its balance sheet. More compellingly, profit and loss reporting is compatible with the investors' objectives of stable and growing earnings.
Profit is measured conventionally by setting against the sales revenue for a period the costs expired in earning that revenue. That is, sales are matched against their relevant costs. Profit is therefore more evenly reported than it would be if all cash receipts and payments, capital and revenue, were fully reflected in the accounts of the period in which they are received and paid.
The management accountant also adopts the matching principle when preparing control information in both actual and budgeted form, and also ascertains full product cost as a starting point for setting selling prices.
This outlines the systems and methods used to control the flow of resources through production and service cost centers, for their eventual inclusion in product and period costs.