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Unformatted text preview: Exercise 3-2 (a) Accrual-basis accounting records the transactions that change a companys financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrual-basis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for. (c) Dear Senator, Currently, the Federal Government uses a cash-basis system rather than an accrual-basis accounting system. There must be billions of dollars in liabilities hidden in contracts that have not been recorded, as they have not been paid. While this would dramatically increase the deficit at lease the American people would have a more accurate picture of what our government owes or should be receiving. Sincerely, Team C P3-2A (a) J1 DATE Account Titles and Explanation Ref. Debit Credit Aug. 31 Insurance Expenses ($400 x 3) 722 1,200 Prepaid Insurance.130 1,200 31 Supplies Expenses ($3,300 - $600).. 631 2,700 Supplies. 126 2,700 31 Depreciation Expense-Cottages.. 620 1,500 ($6,000 X ) Accumulated Depreciation Cottages.144 1,500 31 Depreciation Expense-Furniture.. 621...
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- Spring '09