Chapter_3_-_Class_Discussion_Solutions_Libby_4th_edition -...

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Unformatted text preview: E3-3Cash Basis Income StatementAccrual Basis Income StatementRevenues:Cash salesCustomer deposits$4,0001,000Revenues:Sales to customers$10,000Expenses:Inventory purchasesWages paid 2,000600Expenses:Cost of salesWages expenseUtilities expense7,000600200Profit$2,400Profit$2,200The 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.E3–6Req. 1 and 2Accounts Affected and Type of AccountCash Received (Paid) in JulyAmount of Revenue Earned or Expense Incurred in JulyORWhy a Revenue or an ExpenseIs Not Recognized(a)Cash (+A)Game fees revenue (+R)$10,000$10,000(b)Cash (+A)Trade receivables (+A)Equipment sales revenue (+R)Cost of sales (+E)Inventory (-A)$3,000$ 5,000$(2,800)(c)Cash (+A)Trade receivables (-A)$1,000No revenue earned in July; collections in July related to earnings in June.(d)Cash (+A)Deferred revenue (+L)$1,500No revenue earned in July; earnings process is not yet complete.(e)Accounts payable (+L)Cash (-A)Utilities expense (+E→-SE)$(2,000)$(2,200) incurred in July;(f)Cash (-A)Wages expense (+E→-SE)$(4,000)$(4,000)(g)Cash (-A)Prepaid expense (+A)Insurance expense (+E→-SE)$(1,200)$(400) incurred in July; 1/3 of the insurance has been used up in July.(h)Cash (-A)Repairs and maintenance expense (+E→-SE)$(1,000)$(1,000)Totals$7,300$4,600Req. 3The net cash flow from these transactions is $7,300, but the difference between revenues and expenses is $4,600. The reason for the difference of $2,700 is that some cash receipts in July relate to sales made in June, and other cash receipts in July relate to revenue to be earned in the future. At the same time, collection of some revenue earned in July will be made in future months....
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Chapter_3_-_Class_Discussion_Solutions_Libby_4th_edition -...

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