The "accrual" method of recognizing sales is an important concept to understand, because under this system, a company might not have actually received the "revenues" on its income statement.
Revenues don't necessarily represent the receipt of cash in a sale. Many firms "accrue" revenues -- booking sales when goods are shipped, when services are rendered, or as a long-term contract proceeds through stages of completion.
Imagine the Beehive Wig Co. (ticker: MARGE). With the accrual method, if it has shipped 1,000 crates of wigs, but hasn't yet received payment for them, those sales still appear on the income statement. The checks "in the mail" get reported as "accounts receivable" on the balance sheet.
Keep an eye on receivables, to make sure a company isn't booking as sales that which it cannot collect. Also, make sure it's not packing sales into this quarter that really belong in the next quarter. You can learn more about accrual accounting and other cash flow issues in this Richard McCaffery article.
To learn more about investing Foolishly, visit our Fool's School. Or check out some of our well-regarded online seminars.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
