Question

On June 1, Royal Corp. began operating a service company with an initial cash investment by shareholders of $3,721,000. The company provided $7,400,000 of services in June and received full payment in July. Royal also incurred expenses of $2,129,000 in June that were paid in August. During June, Royal paid its shareholders cash dividends of $600,000. What was the company's income before income taxes for the two months ended July 31 under the following methods of accounting?

Answer 1

Answer:

a. Cash basis of accounting - $7,400,000

b. Accrual basis of accounting - $5,271,000

Explanation:

Mainly there are two methods of accounting for recording transactions in financial statements. They are - Cash basis of accounting and the accrual basis of accounting

Under the cash basis of accounting, whenever the cash is received it will be recorded. So, $7,400,000 would be recorded as a company's income before income taxes.  

And, under the accrual basis of accounting, whether cash is received or not but it will be recorded in the books of accounts.

So, the income before income taxes would be

= Revenue - expenses

= $7,400,000 -  $2,129,000

= $5,271,000