Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 4 - Accrual Accounting Concepts - Exercises: E4-7

Answer

(a) Sales revenue in accrual basis will be completed when the goods are exchanged and the transaction is completed as per the agreement. In the cash basis it is completed when the payment will be collected after 180 days. Purchase will be recorded at the same time on cash basis and accrual basis, because payments are made immediately on delivery. (b) Even after having favorable net income, the company has shortfall of cash, because its entire sale is on credit, and the credit period is also a long, of 180 days. On the other hand, the company requires making payment in cash on delivery for all its purchase.

Work Step by Step

(a) Insurance paid for 2 years will be expenses under cash basis; however it will be an asset under accrual basis. Salary accrued but not paid will be an expense for the period when due under accrual basis. However, it will be an expense in the period of payment, under cash basis. (b) When there is on/ little cash receipts and more cash payments, there will be a short fall in cash balance. Having a positive net income does not guarantee the positive cash flows.
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