Question

In its first year of operations, Roma Company reports the following. Earned revenues of $63,000 ($55,000 cash received from customers). Incurred expenses of $34,500 ($26,550 cash paid toward them). Prepaid $11,250 cash for costs that will not be expensed until next year. Compute Roma’s first-year net income under the cash basis and the accrual basis of accounting.

Answer 1

Answer:

Net income for current year on accrual basis = $28,500

Cash Basis Net Income  = $17,100

Explanation:

As for the provided information we have,

Revenues earned = $63,000

Cash received = $55,000

Expenses incurred for the year = $34,500

Cash paid for the above = $26,550

Prepaid expense for 2nd year as will not be charged in current year amounting $11,250

For accrual basis, the expenses and income related to current period are considered, irrespective of the fact, whether cash is received or not for such transactions, in the current year itself.

Therefore, Net income for current year on accrual basis shall be:

Revenue Earned - Expense incurred = $63,000 - $34,500 = $28,500

Net income as per cash basis will only include cash receipts and cash expenses, whether they relate to current year or not.

Revenue = $55,000

Expenses = $26,550 + $11,250 = $37,900

Cash Basis Net Income = $55,000 - $37,900 = $17,100

Final Answer

Net income for current year on accrual basis = $28,500

Cash Basis Net Income  = $17,100