Question

Lay Perfect Pillow Company sells specialty pillows and accessories to customers. Its fiscal year ends on December 31. The following transactions occurred in the current year: (a) Purchases $250,000 of new pillow inventory; paid $90,000 in cash and owed the rest on account. (b) Paid employees $180,300 in wages for work during the year; an additional $3,700 for the current year's wages will be paid in January of the next year. (c) Sold pillows to customers for $750,000: received $500,000 in cash and customers owed the rest on account. The cost of the pillow inventory to Lay Perfect Pillow was $485.000 (d) Paid 17.200 cash for utilities for the year. (e) Received $70,000 from customers as deposits on orders of new pillows to be sold to the customers in January of the next year. (f) Received a $1.930 utilities bill for December of the current year that will be paid in January of the next year Which basis of accounting (cash or accrual) provides more useful information to investors, creditors and other users? Why?

Answer 1

Answer:

Accrual Basis

Explanation:

The cash accounting basis only treats transactions only as and when cash is paid or received. It ceases to recognize liabilities, debtors, investments etc. Which limits the amount of information available to the users.

With the Accrual Basis, it provides very useful information to the users, such as investments made, the capital position of the entity the risk associated with investing in the entity considering the credit rating of the entity through its Liability to Asset computation. Accrual basis also help the user know the quality of management staff available, since information such as Creditors collection period and Turnover rate. Which can tell how efficient the management is working. In addition the Accrual basis includes the cash basis because of the preparation of the cash flow statement.