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Chapter_3_-_Class_Discussion_Solutions_Libby_4th_edition -...

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E3-3 Cash Basis Income Statement Accrual Basis Income Statement Revenues: Cash sales Customer deposits $4,000 1,000 Revenues: Sales to customers $10,000 Expenses: Inventory purchases Wages paid 2,000 600 Expenses: Cost of sales Wages expense Utilities expense 7,000 600 200 Profit $2,400 Profit $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. E3–6 Req. 1 and 2 Accounts Affected and Type of Account Cash Received (Paid) in July Amount of Revenue Earned or Expense Incurred in July OR Why a Revenue or an Expense Is Not Recognized (a) Cash (+A) Game fees revenue (+R) $10,000 $10,000 (b)
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