Question

3-36 Cash and Accrual Methods. Carmen opens a retail store. Her sales during the first year are $600,000, of which $30,000 has not been collected at year-end. Her purchases are $400,000. She still owes $20,000 to her suppliers, and at year-end she has $50,000 of inventory on hand. She incurred operating expenses of $160,000. At year-end she has not paid $15,000 of the expenses. a. Compute her net income from the business assuming she elects the accrual method. b. Compute her net income from the business assuming she elects the cash method. c. Would paying the $15,000 she owes for operating expenses before year-end change her net income under accrual method of reporting? under the cash method?

Answer 1

Answer:

accrual net income:      90,000

cash basis net income: 45,000

c) paying the expenses will not modify the accrual basis as the expenses were recognize when generated.

under cash basis this payment will decrease net income by 15,000 resulting in a net income of 30,000

Explanation:

accrual method: we recognize based on the operations effect on the equity regardless of the cash disbursements and collections.

sales for the year:     600,000

COGS                        (350,000) *

Gross Profit                250,000

Operaing expenses (160,000)

Income                         90,000

*beginning + purchase - ending = COGS

  0       + 400,000 - 50,000 = 350,000

cash basis: only cash collectionand disbursement matter

Sales collected              570,000   /// 600,000 - 30,000

Merchandise payment (380,000) ///  400,000 - 20,000

paid expenses              (145, 000) ///   160,000 - 15,000

Net Income                      45,000