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Unformatted text preview: E3-3
Profit Accrual Basis
Sales to customers
Cost of sales
Profit $10,000 7,000
$2,200 The cash basis considers only the cash receipts and cash payments regardless of the revenues
generated in March and the related expenses. Revenues under the cash basis would include
amounts received for sales made in earlier months, and exclude sales for which collection will
occur in the future. Similarly, expenses under the cash basis do not take into consideration those
expenses that benefited the company in March but will be paid in future months. In this
particular case, the cash-basis profit shows a better performance than the accrual-basis profit, but
the latter provides a better indication of the operating performance of the company in a given
accounting period. E3–11
Position Income Statement Assets Liabilities Shareholders’
Equity Revenues Expenses Profit a. +53 NE +53 NE NE NE b. +30,563 +30,563 NE NE NE NE c. –34 –34 NE NE NE NE d. +50,710
–33,337 NE +17,373 +50,710 +33,337 +17,373 e. –2,048 NE –2,048 NE NE NE f. +889
–889 NE NE NE NE NE g. –2,920 +1,460 –4,380 NE +4,380 –4,380 h. +353 NE +353 +353 NE +353 i. NE +185 –185 NE +185 –185 Transaction (d) results in an increase in an asset (Trade receivables) and a decrease in another
Transaction (f) results in an increase in an asset (property, plant and equipment) and a decrease in
another asset (cash). Therefore, there is no net effect on assets.
Transaction (h) results in an increase in two asset accounts, namely cash and interest receivable,
for a total of $353. ...
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This note was uploaded on 12/19/2011 for the course AFM 101 taught by Professor Kennedy during the Fall '08 term at Waterloo.
- Fall '08