unit 4 accounting dq - cash based system accounts do not...

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Hello professor and class, I think the revisions to the financial statements would be correct. When Cliff Hall opened Meridian Company they were using a cash based financial system. According to the cash method of accounting, you record income only when you receive cash from your customers. You record an expense only when you write a check to the vendor. This method isn’t usually used for businesses because it can distort the income and expenses, which could of happened in this case making it look as if Meridian needed extra capital. According to the accrual basis of accounting, revenues are reported on the income statement when they are earned. Expenses are matched with the related revenues or are reported when the expense occurs. Accrual accounting is highly recommended for all businesses because it gives you a clearer picture of the financial situation, and is less distorted. The inclusion of the $20,000 in accounts receivable could be correct because Cliff Hall converted his finances from a cash based system to the accrual basis of accounting. Under the
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Unformatted text preview: cash based system accounts do not require adjusting, because transactions are recorded only when cash is received or paid. Under the accrual basis the $20,000 is recorded when it is earned. Making this adjustment to accounts receivable correct. Cliff Hall was not very professional and ethical when it came to applying for the loan at the second bank. Cliff should have been honest and explained why he was denied in the first place. Also, when Cliff first started his business he should have automatically used the accrual accounting system because it is required. This could have saved him wasted time and being denied. Cliff should have also brought his original financial statements and the revised one to the second bank to have proof. Sources; Owner's Toolkit: Small Business Guide www.toolkit.com/small_business_guide/index.aspx Cash-Basis and Accrual Accounting Description www.accountingaide.com...
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