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 hardwarestore. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrualbased financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He does not seethe purpose of accrual based statements. His most recent outburst went something like this: “After all, I collectcash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show mybuilding and equipment as assets and depreciate them. I just don’t understand the problem.”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 operatingcash flow?3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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 does not 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
cash flow?
3. Explain the purpose of
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