CONNECT ONLINE ACCESS FOR INTERMEDIATE
CONNECT ONLINE ACCESS FOR INTERMEDIATE
10th Edition
ISBN: 9781264798834
Author: SPICELAND
Publisher: MCG
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Chapter 2, Problem 2.1DMP

Judgment Case 2–1

Cash versus accrual accounting; adjusting entries; Chapters 1 and 2

• 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 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 operating cash flow?

3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.

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The following data were selected from the records of Fluwars Company for the year ended December 31, current year:   Balances at January 1, current year:     Accounts receivable (various customers) $ 111,500 Allowance for doubtful accounts   11,200     The company sold merchandise for cash and on open account with credit terms 1/10, n/30, without a right of return.   The following transactions occurred during the current year: Sold merchandise for cash, $252,000. Sold merchandise to Abbey Corp; invoice amount, $36,000. Sold merchandise to Brown Company; invoice amount, $47,600. Abbey paid the invoice in (b) within the discount period. Sold merchandise to Cavendish Inc.; invoice amount, $50,000. Collected $113,100 cash from customers for credit sales made during the year, all within the discount periods. Brown paid its account in full within the discount period. Sold merchandise to Decca Corporation; invoice amount, $42,400. Cavendish paid its account in full after the…
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CONNECT ONLINE ACCESS FOR INTERMEDIATE

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