ADM 1340 Lecture 6: Notes- Lecture 6
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Under accrual-basis accounting
A. | events that change a company's financial statements arerecognized in the period they occur rather than in the period inwhich cash is paid or received. | |
B. | net income is calculated by matching cash outflows against cashinflows. | |
C. | the ledger accounts must be adjusted to reflect a cash basis ofaccounting before financial statements are prepared under generallyaccepted accounting principles. | |
D. | cash must be received before revenue is recognized. |
(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)Γ’ΒΒHough Consulting had the following selected transactions in July: | |
July 1 Prepaid insurance for July through September, $4,200.
2 Purchased office furniture for cash, $5,000.
3 Performed consulting services for a client on account, $3,500.
5 Paid advertising expense, $500.
10 Performed consulting services and received cash, $1,500.
20 Purchased a computer on account, $2,500.
25 Collected for July 3 service.
26 Paid account payable from July 20.
29 Paid salary expense, $1,800.
31 Adjusted for July insurance expense (see July 1).
31 Earned revenue of $1,000 that was collected in advance back in June.
31 Recorded July depreciation on fixed assets, $125.
LO USING EXCEL:
1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.
2. Compute July income (loss) before tax under each accounting method
3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 3 and July 25 to explain.
Req. 1 & 2 | ||||||
Hough Consulting | ||||||
Amount of Revenue (Expense) for July | ||||||
Date | Cash Basis | Accrual Basis | ||||
July 1 | ||||||
Income (loss) before tax | $ - | $ 0 | ||||
Req. 3 | ||||||