Chapter 2, Problem 2.7E

Cash versus Accrual Bases of Accounting. Top Notch Services was founded on January 2 and offers computer consulting and other technology-related services. During its first quarter of operations, the following events occurred:

1. a. In January, Top Notch provided and billed clients for $40,000 of consulting services. It was paid for these services in March.
2. b. In January, Top Notch collected $25,000 from clients for services provided during the month.
3. c. In February, Top Notch provided and billed clients for $45,000 of consulting services. It collected $12,000 in the current month and the remaining amount in March.
4. d. In March, Top Notch collected $34,000 from clients for services provided during the month and billed clients for an additional $21,000 for services provided.
5. e. Top Notch pays employees at the end of each month for service provided. Monthly payroll was $12,000, $13,000, and $15,000 in January, February, and March, respectively.
6. f. Top Notch pays its utility bills at the end of each month. Utility bills totaled $800, $850, and $1,000 in January, February, and March, respectively.
7. g. Top Notch hired an independent contractor who provided $1,200 of services in February. The contractor was paid in March.

Determine Top Notch’s net income for each month from January through March under both the cash and the accrual bases of accounting. Explain any difference in total net income under cash versus accrual accounting for the three months.