Concept explainers
Judgment Case 2–1
Cash versus accrual accounting;
• LO2–4, LO2–8
You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He doesn’t see the purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and
Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.
2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating
3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.
Trending nowThis is a popular solution!
Chapter 2 Solutions
INTERMEDIATE ACCT VOL.2>CUSTOM<
- Financial statements Assume that you recently accepted a position with Five Star National Bank Trust as an assistant loan officer. As one of your first duties, you have been assigned the responsibility of evaluating a loan request for 300,000 from West Gate Auto Co., a small corporation. In support of the loan application, Joan Whalen, owner and sole stockholder, submitted a Statement of Accounts" (trial balance) for the first year of operations ended October 31, 2016. West Gate Auto Co. Statement of Accounts October 31,2016 Cash.......................... 5,000 Billings Due from Others........ 40,000 Supplies (chemicals, etc.)........ 7,500 Building....................... 222,300 Equipment..................... 50,000 Amounts Owed to Others....... 31,000 Investment in Business......... 179,000 Service Revenue............... 215,000 Wages Expense................ 75,000 Utilities Expense............... 10,000 Rent Expense................... 8,000 Insurance Expense.............. 6,000 Other Expenses................ 1,200 425,000 425,000 1 Explain to Joan Whalen why a set of financial statements (income statement, retained earnings statement, and balance sheet) would be useful to you in evaluating the loan request. 2 In discussing the "Statement of Accounts with Joan Whalen, you discovered that the accounts had not been adjusted at October 31. Analyze the "Statement of Accounts" and indicate possible adjusting entries that might be necessary before an accurate set of financial statements could be prepared. 3 Assuming that an accurate set of financial statements will be submitted by Joan Whalen in a few days, what other considerations or information would you require before making a decision on the loan request?arrow_forwardQ.2.1 Open, post to and balance the debtors control account in the general ledger of Dumbledore Magic World for May 2019. The balance brought down on 1 May 2019 was R 71 821.20arrow_forwardQ.3.1 Taking into account all the errors/omissions noted above, prepare the corrected Creditors Control account for the month of June 2021.arrow_forward
- PA3. LO 8.5Domingo Company started its business on January 1, 2019. The following transactions occurred during the month of May. Prepare the journal entries in the journal on Page 1.The owners invested $10,000 from their personal account to the business account.Paid rent $500 with check #101.Initiated a petty cash fund $500 with check #102.Received $1,000 cash for services rendered.Purchased office supplies for $158 with check #103.Purchased computer equipment $2,500, paid $1,350 with check #104, and will pay the remainder in 30 days.Received $800 cash for services rendered.Paid wages $600, check #105.Petty cash reimbursement: office supplies $256, maintenance expense $108, postage expense $77, miscellaneous expense $55. Cash on hand $11. Check #106.Increased petty cash by $30, check #107.arrow_forwardPQ 2.8Record the following transactions in the expanded accounting equation. The running balance may be omitted for simplicity.a. Baker invested $60,000 in a computer company.b. Bought computer equipment on account, $10,000.c. Baker paid personal telephone bill from company checkbook, $150. d. Received cash for services rendered, $14,000.e. Billed customers for services rendered for month, $30,000.f. Paid current rent expense, $3,500.g. Paid supplies expense, $1,470.arrow_forwardChapter 7 p. 514 Problem Set A PA3 The following transactions occurred for Donaldson Inc. during the month of July. Jul. 1 Sold 50 items to Palm Springs Inc. and offered terms of 2/10, n/30, $4,000 on July 1, and issued invoice #12 on account number #312Jul. 5 Sold 20 thing-a-jigs to Miami Inc. for $2,150 cash on July 5, and issued invoice #13Jul. 8 Sold 30 what-is to Smith Mfg. for $5,000 and offered terms of 2/10, n/30; issued invoice #14 on account number #178Jul. 9 Received payment from Palm Springs Inc.Jul. 22 Received payment from Smith Mfg. after expiration of the discount period Record the transactions for Donaldson Inc. in the proper special journal and subsidiary ledger. SALES JOURNAL Page 22 Date Account Invoice No. Ref. DR Accts. Receivable CR Sales DR COGS CR Merchandise Inventory 2019 Jul. 1 Palm Springs Inc. (312) 12 ???? 2,000.00 Jul. 8 Smith Mfg (178) 14 ???? 2,500.00 Date…arrow_forward
- Chapter 7 p. 514 Problem Set A PA3 The following transactions occurred for Donaldson Inc. during the month of July. Jul. 1 Sold 50 items to Palm Springs Inc. and offered terms of 2/10, n/30, $4,000 on July 1, and issued invoice #12 on account number #312Jul. 5 Sold 20 thing-a-jigs to Miami Inc. for $2,150 cash on July 5, and issued invoice #13Jul. 8 Sold 30 what-is to Smith Mfg. for $5,000 and offered terms of 2/10, n/30; issued invoice #14 on account number #178Jul. 9 Received payment from Palm Springs Inc.Jul. 22 Received payment from Smith Mfg. after expiration of the discount period A. Record the transactions for Donaldson Inc. in the proper special journal and subsidiary ledger. SALES JOURNAL Page 22 Date Account Invoice No. Ref. DR Accts. Receivable CR Sales DR COGS CR Merchandise Inventory 2019 Jul. 1 Palm Springs Inc. (312) 12 2,000.00 Jul. 8 Smith Mfg (178) 14 2,500.00 ASH RECEIPTS…arrow_forwardYour answer: Chapter 2 2 8 14 B. Answer the following chapter-end question. Chapter 2 Q. 1. Identify the four financial statements and describe the purpose of each. Your answer: Q. 6. Explain the difference between current and noncurrent assets and liabilities. Why is this distinction important to stakeholdersarrow_forwardP 2–3 Adjusting entries ● LO2–6 Account Title Debits Credits Cash 30,000 Accounts receivable 40,000 Supplies 1,500 Inventory 60,000 Notes receivable 20,000 Interest receivable –0– Prepaid rent 2,000 Prepaid insurance 6,000 Office equipment 80,000 Accumulated depreciation 30,000 Accounts payable 31,000 Salaries payable –0– Notes payable 50,000 Interest payable –0– Deferred sales revenue 2,000 Common stock 60,000 Retained earnings 28,500 Dividends 4,000 Sales revenue 146,000 Interest revenue –0– Cost of goods sold 70,000 Salaries expense 18,900 Rent expense 11,000 Depreciation expense –0– Interest expense –0– Supplies expense 1,100 Insurance expense –0– Advertising expense 3,000 Totals 347,500 347,500 Information necessary to prepare the…arrow_forward
- Pls only do part D Question 3. AGM Accounting received an invoice dated Jun 4th. The invoice is for office equipment and the supplier charged AGM $14,000 less 30%, with terms 4/15, n/45, ROG. The furniture arrives on Jul 10th.a) What date is the cash discount valid until?b) How much will AGM have to pay if it takes advantage of the cash discount?c) What date is the credit period valid until?d) Suppose AGM sends a $7,000 cheque for partial payment on Jul 17th. How much does AGM still owe after this payment? Assume the cash discount period has passed and we are still within the credit period.arrow_forwardPB5. LO 3.4Indicate what impact (+ for increase; – for decrease) the following transactions would have on the accounting equation, Assets = Liabilities + Equity. Transaction Impact 1 Impact 2 Paid balance due for accounts payable Charged clients for legal services provided Purchased supplies on account Collected legal service fees from clients for current month Issued stock in exchange for a note receivablearrow_forward
- Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning