Section_2 - Homework Section 2 Solutions The Cash Basis of...

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Homework – Section 2 Solutions The Cash Basis of Accounting 1. When does the cash basis of accounting record revenues and expenses? When cash is received from a customer and when cash is paid for a business cost. 2. What is the difference between the two main accounts that comprise owners’ equity – capital stock (or common stock) and retained earnings? Capital stock or common stock represents the amounts given by the company’s stockholders in exchange for an ownership interest. Retained earnings represents the net accumulation of earnings less dividends a company has had since its inception. 3. Which types of transactions affect a company’s retained earnings balance? Revenues, expenses, and dividends. 4. True or False: It is not possible for retained earnings to be negative. False – It is possible if accumulated net losses have exceeded net income amounts. 5. Describe at least three transactions that could cause a company’s cash account balance to increase . Capital contributions by owners. Borrowing money from a creditor. Collections from customers. Sale of long-term assets (ex. equipment). 6. Describe at least three transactions that could cause a company’s cash account balance to decrease . Dividends paid to stockholders. Repayment of loans to creditors. Purchase of long-term assets. Payments in the ordinary course of business (ex. rent, salaries, insurance, interest, utilities). 7. During 2008, Wolfpack Inc. had the following transactions occur: $100,000 worth of services were performed for customers. Customers paid $75,000 in 2008 and the remaining $25,000 in 2009. $60,000 worth of expenses were incurred in the ordinary course of business. The company paid $45,000 for these expenses in 2008 and the remaining $15,000 in 2009. ** Assume that Wolfpack had no other transactions in 2008 or 2009.
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A. If Wolfpack uses the cash basis of accounting, how much net income will be reported in 2008 and 2009, respectively? 2008: $75,000 - $45,000 = $30,000 2009: $25,000 - $15,000 = $10,000 B. If Wolfpack uses the accrual basis of accounting, how much net income will be reported in 2008 and 2009, respectively? 2008: $100,000 - $60,000 = $40,000 2009: $0 C. Using your answers to the above, complete the following schedule: 2008 2009 Total Cash Basis Net Income $30,000 $10,000 $40,000 Accrual Basis Net Income $40,000 $ 0 $40,000 D. Compare the two total amounts from the above chart. What do you notice?
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