PowerPoint+Slides+for+Accrual+vs+Cash+Basis

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Unformatted text preview: Most companies use accrual-basis accounting recognize revenue when it is earned and expenses in the period incurred, without regard to the time of receipt or payment of cash. Under the strict cash basis, companies record revenue only when they receive cash, and record expenses only when they disperse cash. Cash basis financial statements are not in conformity with GAAP. Chapter 3- 1 LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the To convert from cash to accrual basis – Cash Receipts – Beg AR + End AR = Accrual based revenue Cash Receipts + Beg UR – End UR = Accrual based revenue Cash Expenses + Beg PE – End PE = Accrual based expenses Cash Expenses – Beg AL + End AL = Accrual based expenses Chapter 3-2 LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Illustration: Quality Contractor signs an agreement to construct a garage for $22,000. In January, Quality begins construction, incurs costs of $18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Quality collects $22,000 cash from the customer. In March, Quality pays the $18,000 due the creditors. Illustration 3A-1 Chapter 3- 3 Solution on notes page LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Conversion From Cash Basis To Accrual Basis Illustration: Dr. Diane Windsor, like many small business owners, keeps her accounting records on a cash basis. In the year 2010, Dr. Windsor received $300,000 from her patients and paid $170,000 for operating expenses, resulting in an excess of cash receipts over disbursements of $130,000 ($300,000 ­ $170,000). At January 1 and December 31, 2010, she has accounts receivable, unearned service revenue, accrued liabilities, and prepaid expenses as shown in Illustration 3A­5. Illustration 3A-5 Chapter 3- 4 LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Conversion From Cash Basis To Accrual Basis Illustration: Calculate service revenue on an accrual basis. Illustration 3A-8 Illustration 3A-5 Chapter 3- 5 Solution on notes page LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Conversion From Cash Basis To Accrual Basis Illustration: Calculate operating expenses on an accrual basis. Illustration 3A-11 Illustration 3A-5 Chapter 3- 6 Solution on notes page LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Conversion From Cash Basis To Accrual Basis Illustration 3A-12 Chapter 3-7 LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the Theoretical Weaknesses of the Cash Basis Today’s economy is considerably more lubricated by credit than by cash. The accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. Investors, creditors, and other decision makers seek timely information about an enterprise’s future cash flows. Chapter 3-8 LO 8 Differentiate the cash basis of accounting from LO the accrual basis of accounting. the ...
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