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Lecture 2

MGAB01H3 Lecture Notes - Lecture 2: Retained Earnings, Trial Balance, Deferral


Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen
Lecture
2

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Chapter 3 – In Class Discussion Questions
E3–3 Reporting Cash Basis versus Accrual Basis Earnings
Mostert Music Company had the following transactions in March:
1. Sold instruments to customers for $15,000; received $10,000 in
cash and the rest on account.
2. Determined that the cost of the instruments sold was $9,000.
3. Purchased $3,000 of new instruments inventory; paid $1,000 in
cash and the rest on account.
4. Paid $750 in wages for the month.
5. Received a $200 bill for utilities that will be paid in April.
6. Received $3,000 from customers as deposits on orders of new
instruments to be sold to customers in April.
Complete the following statements:
Does the cash basis or the accrual basis of accounting provide a better
indication of the operating performance of Mostert Music Company in
March? Explain.
1. You write the remaining 5000$ in notes and recognize when u receive it for cash basis
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2. Doesn’t say cash… so can’t recognize it for cash basis, for accrual
u do recognize it
3. You recognize the $1000 for COGS when you pay the $2000 you
recognize it for cash basis don’t need to do anything for accrual
basis- you debit inventory 3000, CR cash 1000 and AP-so nothing
here
4. Is it an expense- yes for cash basis and accrual. Under cash basis
we recognize wages because we pay. Under accrual we don’t care
about cash- did we use the service? Yes, because employee worked
for the month.
5. Under accrual basis acctg if you use, expense. But under cash= did
I pay or not? No they didn’t pay. So not an expense in Marrch…
itll be a expense in April.
6. Under accrual can’t recognize revenue, under cash you can
Cash basis stmt of earnings
revenue
ocash sales: 10,000 (1)
ocustomer deposit: 3000 (6)
expense
oinventory purchase 1000 (3)
owages paid (750)
total: 1750 /
Net earnings-11250//
Accrual basis
Revenue
oSales: 15,000 (1)
Expenses
oCost of sales: 9000 (2)
oWagesexpense-750 (4)
oUtilities expense- 200 (5)
Total: 9950/
Net earnings= 5050 //
Therefore accrual basis is better/ more accurate
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