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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise 3-41 Cash-Basis and Accrual-Basis Accounting

The records of Summers Building Company reveal the following information for 2019.

  1. Cash receipts during 2019 (including $50,000 paid by stockholders in exchange for common stock) were $273,500.
  2. Cash payments during 2019 (including $8,000 of dividends paid to stockholders) were $164,850.
  3. Total selling price of services billed to customers during 2019 was $201,700.
  4. Salaries earned by employees during 2019 were $114,250.
  5. Cost of supplies used during 2019 in operation of the business was $47,325.

Required:

  1. Calculate Summers Building’s net income for 2019 on an accrual basis.
  2. Calculate Summers Building’s net income for 2019 on a cash basis.
  3. CONCEPTUAL CONNECTION Explain how cash-basis accounting allows for the manipulation Of income.

To determine

Concept Introduction:

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

Requirement-1:

To Calculate:

The Net income for the year 2019 using accrual basis.

Explanation

The Net income for the year 2019 using accrual basis is calculated as follows:

    Summers Building Company
    Accrual Basis Net Income
    For the year 2019
To determine

Concept Introduction:

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

Requirement-2:

To Calculate:

The Net income for the year 2019 using Cash basis.

To determine

Concept Introduction:

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

Requirement-3:

To Indicate:

How cash basis accounting allows manipulation of Net income.

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