Chapter 3, Problem 3.66BP

LO 1

(Learning Objective 1: Explain how Accrual accounting differs from cash-basis accounting) Westchester Consulting had the following selected transactions in May:

May 1	Prepaid insurances for May through July, 42, 250.
4	Purchased office furniture for cash, $4,000.
5	Performed services and received cash, $1, 000.
8	Paid advertising size expense, $300.
11	Performed service on account. $53,500.
19	Purchased computer on account. $2,000.
24	Collected for may 11 service.
26	Paid account payable from May 19.
29	Paid salary expense, $1,000.
31	Adjusted for May insurance expense (see May 1).
31	Earned revenues of $1,000 that was collected in advance back in April.
31	Recorded May depreciation expense on all fixed assets, $108.

Requirements

1. 1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.
2. 2. Calculate May income (loss) before tax under each accounting method.
3. 3. Indicate which measure of net income or net loss is preferable. Use the transactions on May 11 and May 24 to explain.