Judgetment Case 2-1

862 Words Mar 20th, 2013 4 Pages
Explain the difference between a cash basis and accrual basis measure of performance. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow? Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting. Requirement 1 From the Liberty University on-line library I was able to obtain an article called “Cash vs. Accrual Accounting” (Cantu, October 2012). This articles gives examples of cash method and accrual basis method. I was also able to find a newspaper article on “Accrual vs. Cash Method of Accounting” (Anonymous, 2011). This newspaper article defines accrual method of accounting and the cash method of accounting. …show more content…
2013). In most cases, accrual basis net income provides a better measure of performance than net operating income cash flow. As stated by newspaper article, very small companies start out by using the cash basis (Anonymous 2011). The article also states it is easier for them to track cash flow which is the lifeblood of a company. Cantu states, “The first downside is that cash accounting can make operations appear financially healthier than they are.” Her example states, a contractor gets a $20,000 remodeling job and orders $8, 000 worth of supplies on credit. He starts the job on March 1 and receives a $5,000 deposit before beginning his work. With cash accounting, it appears that he has made $5,000 revenue in March. Despite appearances of being in the black, he is actually in the red $3,000 because he still has to pay for his supplies. Another problem, with cash accounting Cantu states, it is easy to confuse cash flow with profit, "If producers are able to pay their bills, many assume that they are making a profit, when actually they 're just experiencing cash flow," Bevers says. "True profit occurs when a producer has paid all of the expenses including depreciation and has built wealth." The text book also supports the fact that net operating cash flow may not
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