Question

Sanni Co. had $150,000 in cash-basis pretax income for the year. At the current year end, accounts receivable decreased by $20,000 and accounts payable increased by $16,000 from their previous year-end balances. Compared with the accrual-basis method of accounting, Sanni’s cash-basis pretax income is

Answer 1

Answer:

Higher by $36000

Explanation:

Given:  Cash income= $150000

Accural basis method of recording transaction in real time as income is recorded when it is earned and expenses are recorded, when it is incurred.

Cash‐basis pre‐tax income $150,000

Decrease in accounts receivable = $20,000

In the given case, The Account Receivable (AR) decrease by $20,000  implies that cash received on account was $20,000 greater than accrual sales.

Increase in accounts payable = $16,000 .

The accounts payable increase by $16,000 implies that more inventory was purchased and included in accrual cost of goods sold than was paid.

Accrual‐basis income $186,000 This cash pretax income is $36,000 $( 186,000 - 150,000)$ higher than the accrual‐basis income.