3. Define accrual accounting and contrast it with cash basis accounting.
Accrual basis accounting is a widely used accounting method which involves updating the financial statement by simply recording the earnings and expenses as they occur. Revenues are recognized when goods and services are delivered to customers and expenses are incurred when there is a decrease in the company’s resources. Accrual basis accounting is much preferred by businesses due to its advantageous characteristics as compared to cash basis accounting. In accrual basis accounting, the expenses and earnings are recorded immediately as the transaction takes place. On the other hand, cash basis accounting monitors the cash inflow and outflow. Thus, revenues are recorded only upon the receipt of payment, while expenses are noted down only after the company pays them. A transaction is not recorded until it involves cash flow. Hence, transactions made on credit are not recorded until they are paid (Tatum, 2008).
It is easy to assess the overall financial status of the company upon utilizing accrual basis accounting (Tatum, 2008). Accrual basis accounting is more detailed and organized than that of the cash basis accounting.
4. What four conditions must normally be met for revenue to be recognized as accrual basis accounting?
There are conditions that should be satisfied in order for the revenue to be recognized as accrual basis accounting. First, the company must be able to execute its promise. This means that cash can be received (1) in the same period as the promised acts are performed, (2) in a period before the promised acts are performed, or (3) in a period after the promised acts are performed (Phillips, Libby, & Libby, 2006).
M3-2 Report Cash Basis versus Accrual Basis Income
Cash Basis Income Statement
Accrual Basis Income Statement
Revenues:
Cash sales $ 6000
Customer deposits 1000
Expenses:
Inventory purchases (1000)
Wages paid (600)
Cash income $ 4400
Revenues:
Sales to customers $ 10000
Expenses:
Cost of sales (7000)
Wages expense (600)
Utilities expense (200)
Net income $ 2200
PROBLEM 1-30A Interrelationships among Financial Statements
O’Shea Enterprises started the 2002 accounting period with $30,000 of assets (all cash), $18,000 of liabilities, and $4,000 of common stock. During the year, O’Shea earned cash revenues of $48,000, paid cash expenses of $32,000, and paid a cash dividend to stockholders of $2,000. O’Shea also acquired $10,000 of additional cash from the sale of common stock and paid $6,000 cash to reduce the liability owed to a bank.
Required
a. Prepare an income statement, statement of changes in stockholders’ equity, period-end balance sheet, and statement of cash flows for the 2002 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)
CHECK FIGURES
a. Net Income: $16,000
b. Total Assets: $48,000
O’SHEA ENTERPRISES
Income Statement
For the Year Ended December 31, 2002
Revenue $ 48000
Operating Expenses (32000)
Net Income $ 16000
O’SHEA ENTERPRISES
Statement of Changes in Stockholders’ Identity
For the Year Ended December 31, 2002
Beginning Common Stock $ 4000
Plus: Common Stock Issued 10000
Ending Common Stock $ 14000
Beginning Retained Earnings 8000
Plus: Net Income 16000
Less: Dividends (2000)
Ending Retained Earnings $ 22000
Total Stockholders’ Equity $ 36000
O’SHEA ENTERPRISES
Balance Sheet
As of December 31, 2002
Assets:
Cash $ 48000
Total Assets $ 48000
Liabilities 12000
Stockholders’ Equity:
Common Stock 14000
Retained Earnings 22000
Total Stockholders’ Equity $ 36000
Total Liabilities and Stockholders’ Equity $ 48000
O’SHEA ENTERPRISES
Statement of Cash Flows
For the Year Ended December 31, 2002
Cash Flows from Operating Activities:
Cash Receipts from Revenue $ 48000
Cash Payments for Expenses (32000)
Net Cash Flow from Operating Activities 16000
Cash Flows from Financing Activities:
Cash Receipts from Borrowing Funds (6000)
Cash Receipts from Issuing Common Stock 10000
Cash Payments for Dividends (2000)
Net Cash Flow from Financing Activities 2000
Net Increase in Cash 18000
Plus Beginning Cash Balance 30000
Ending Cash Balance $ 48000
References
Edmonds, T. (2006). Fundamental Financial Accounting Concepts. Boston, Mass. McGraw-Hill Irwin.
Phillips, F., Libby, B. & Libby, P. (2006). Fundamentals of Financial Accounting. Boston: McGraw-Hill/Irwin.
Tatum, M. (2008). What is Accrual Basis Accounting?. Wisegeek. Conjecture Corporation. Retrieved September 4, 2008 from http://www.wisegeek.com/what-is-accrual-basis-accounting.htm.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more