Question

A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $32,000, and paid cash for salaries, $25,000. At the beginning of the year, customers owe the company $3,600. By the end of the year, customers owe $5,200. At the beginning of the year, the company owes salaries of $3,700. At the end of the year, the company owes salaries of $5,400. Determine cash-basis net income and accrual-basis net income for the year.

Answer 1

Answer:

Cash-basis net income is $7,000

Accrual-basis net income is $6,900

Explanation:

Cash-basis net income

Cash basis Net income is the net of cash receipt as income and paid as an expense. The net value of cash received from customers and paid for the salaries is considered as net income.

Net income = Cash received From Customers  - Cash Paid for salaries = $32,000 - $25,000 = $7,000

Accrual-basis net income

Accrual-basis net income is the net value of accrued income and accrued expenses regardless of the receipt or payment of cash

First calculate the sales value

Ending account receivable = Beginning account receivable + Credit sales for the period - Cash received in the period

$5,200 = $3,600 + Credit sales for the period - $32,000

$5,200 = Credit sales for the period - $28,400

Credit sales for the period = $5,200 + $28,400 = $33,600

Now calculate the accrued salary expense for the period

Ending salaries payable = Beginning salaries payable + Salaries expense for the period - Cash paid in the period

$5,400 = 3,700 + Salaries expense for the period - $25,000

$5,400 = Salaries expense for the period - $21,300

Salaries expense for the period = $5,400 + $21,300 = $26,700

The net income is

Net Income = Accrued Sales  - Accrued Expense = $33,600 - $26,700 = $6,900