Cash basis Versus Accrual basis of accounting The main difference between the cash basis accounting and accrual basis accounting is, under cash basis of accounting, revenue earned is recognized and recorded only when cash is received, similarly expenses incurred is recognized and recorded only when it is paid in cash. On the other hand, under accrual basis accounting, revenue earned is recognized and recorded, only when goods are delivered or services are performed irrespective of the cash being exchanged, similarly expenses are recognized and recorded only when expenses are incurred, irrespective of cash being paid. The amount of advertisement expense Firm P should record for two months ending February 28, under cash basis and accrual basis.

Question

Consider a four-year project with the following information: Initial fixed asset investment = $555,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $37; variable costs = $25; fixed costs = $230,000; quantity sold = 79,000 units; tax rate = 24 percent. How sensitive is OCF to changes in quantity sold?

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Chapter 3, Problem 3.1SE

To determine

Cash basis Versus Accrual basis of accounting

The main difference between the cash basis accounting and accrual basis accounting is, under cash basis of accounting, revenue earned is recognized and recorded only when cash is received, similarly expenses incurred is recognized and recorded only when it is paid in cash. On the other hand, under accrual basis accounting, revenue earned is recognized and recorded, only when goods are delivered or services are performed irrespective of the cash being exchanged, similarly expenses are recognized and recorded only when expenses are incurred, irrespective of cash being paid.

The amount of advertisement expense Firm P should record for two months ending February 28, under cash basis and accrual basis.

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