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AFM101 Lecture Notes - Lecture 5: Costco, Revenue Recognition, Matching Principle

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Verified Note
skyoyster237
25 Sep 2018
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM101
Professor
Haihao Lu

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4

AFM101 Lecture Notes - Lecture 4: Share Capital, Cash Cash, Retained Earnings

5

AFM101 Lecture Notes - Lecture 5: Costco, Revenue Recognition, Matching Principle

6

AFM101 Lecture Notes - Lecture 6: Current Liability, Balance Sheet, Retained Earnings

Document Summary

Chapter 3: accrual accounting and the financial statements. Recognizes revenues when cash is received, and expenses when cash is paid, regardless when revenue is earned or expenses are incurred. Recognizes revenues when earned, and expenses when incurred, regardless when cash is received or paid. Records impact of transactions when they occur. Earning of revenue when cash was collected in advance. Abc inc. makes a k sale on account and the product is delivered to the customer. Under cash-basis accounting abc inc. does not record this transaction until cash is received from the customer. Abc inc. earns k in revenue for their services and. Abc inc. purchased k of inventory on account from supplier and acquires k in assets (a/r) in return received the inventory items. Under cash-basis accounting abc inc. does not record this transaction until it pays k to its suppliers. Under accrual accounting, receipt of cash is irrelevant.

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Related Questions

(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting) Hough Consulting had the following selected transactions in July:

July 1 Prepaid insurance for July through September, $4,200.

2 Purchased office furniture for cash, $5,000.

3 Performed consulting services for a client on account, $3,500.

5 Paid advertising expense, $500.

10 Performed consulting services and received cash, $1,500.

20 Purchased a computer on account, $2,500.

25 Collected for July 3 service.

26 Paid account payable from July 20.

29 Paid salary expense, $1,800.

31 Adjusted for July insurance expense (see July 1).

31 Earned revenue of $1,000 that was collected in advance back in June.

31 Recorded July depreciation on fixed assets, $125.

LO USING EXCEL:

1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.

2. Compute July income (loss) before tax under each accounting method

3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 3 and July 25 to explain.

(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting) Hough Consulting had the following selected transactions in July:

July 1 Prepaid insurance for July through September, $4,200.

2 Purchased office furniture for cash, $5,000.

3 Performed consulting services for a client on account, $3,500.

5 Paid advertising expense, $500.

10 Performed consulting services and received cash, $1,500.

20 Purchased a computer on account, $2,500.

25 Collected for July 3 service.

26 Paid account payable from July 20.

29 Paid salary expense, $1,800.

31 Adjusted for July insurance expense (see July 1).

31 Earned revenue of $1,000 that was collected in advance back in June.

31 Recorded July depreciation on fixed assets, $125.

LO USING EXCEL:

1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.

2. Compute July income (loss) before tax under each accounting method

3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 3 and July 25 to explain.

Req. 1 & 2
Hough Consulting
Amount of Revenue (Expense) for July
Date Cash Basis Accrual Basis
July 1
Income (loss) before tax $ - $ 0
Req. 3

How do you reply to this post? Minimum of 150 words. Thank youin advance!

Cash Basis accounting is a very straight forward, single-entryapproach that can work for small businesses that do not have toomany accounts or financial transactions to manage nor do theymaintain large amounts of assets.

Some of the few advantages for this approach is that since it isa straightforward, you receive cash for products sold or servicerendered with minimal delay in between transactions, bookkeeping issimple enough that anyone can understand which “eliminates theneed to a trained bookkeeper or accountant”(Business-Case-Analysis.com). This works well for soleproprietorship operating businesses if there are no financialstatement requirements to be published. It makes it easier for thebusiness to keep tract of their revenues within a few transactionssince it only records when cash is received or expenses are paid.“Cash accounting ensures that taxes are not paid on monies thathave not yet been received; this improves cash flow and ensuresthat funds are available for tax expenditures.”(Mysmp.com).

Some of the disadvantages using cash basis is since it is asingle entry, vice double entry, there is more room for errorunlike accrual where double entry is used, every credit is indirect relation to every debit, there is a way to verify entries.Also, since it can only record revenues when cash is received orexpenses are paid, it does not have to ability to account forpromissory notes and accounts receivable. This significantly lowerstheir possibility for bigger revenue since they can only recordactual movement of cash when it happens. This simplicity also worksagainst the business, “Because cash accounting is so simple, itdoes not allow for tracking the actual dates of sales andpurchases. Additionally, it usually does not provide a means ofmatching these transactions to specific items of inventory”(Mysmp.com). Because this approach can only record actual movementor revenue when it happens, the balance sheet could be inaccuratelyrecorded and could contribute to errors leading to missed paymentsof monies owed or missed revenues owed to them.

Reference:

https://www.business-case-analysis.com/cash-basis-accounting.html

www.mysmp.com/fundamental-analysis/cash-accounting.html