ADM 1340 Lecture Notes - Lecture 3: Current Liability, Matching Principle, Financial Statement

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17 Feb 2017

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ADM 1340 Full Course Notes

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Accrual accounting: records the impact of a business transaction as it occurs; the accountant records the transaction even if it receives or pays no cash. Cash-basis accounting: records only cash transactions: cash receipts and cash payments; cash receipts are revenues, cash payments are expenses. Gaap require accrual accounting: the business records revenues as they are earned and expenses as they are incurred not necessarily when cash changes hands. Cash-basis accounting"s defect is that it ignores important info; incomplete financial statements >> if you make a sale on account, it is not recorded because no cash was received. If you don"t record a sale on account, the balance sheets reports not a/r. The receivable is a real asset and should appear on the balance sheet. Without this reported, your assets are understated. Sales on account provide revenue that increases wealth. Ignoring the sale understates your revenue and net income on the income statement.

Related Questions

QuickBook Questions

1.The Chart of Accounts is the list of accounts such as assets, liabilities, equity, revenues and expenses, which the company intends to use.

True or False

2. The General Ledger and Subsidiary Ledger are the same.

True or False

3. In QB, what is your menu choice to customize custmer payment terms.

A. Lists - Customer & Vendor Profile Lists - Terms

B. Edit - Preferences

C. Customizing the Chart of Accounts List

D. Easy Step Interview

4. The option for making accounts numbers active is

A. Account numbers

B. dimmed account type

C. Edit - preferences

D. Lists- customer & vendor profile lists - terms

5. The type of accounting method used when you recognized revenues when earned and expenses when incurred is referred to as

A. Cash basis of accounting

B. Accrual basis of accounting

C. Tax basis of accounting

D. Corporate basis of accounting

6. Which ledger account would have a subsidiary ledger account attached to it?

A. Accounts Receivable

B. Accounts Payable

C. Inventory Account

D. All accounts listed would have a subsidiary account.

7. If a customer account is listed as 2/10 Net 30 days, you are not allowing any discounts for early payment.

True or False

8. If you change your reports to cash basis from accrual basis, this change will not affect the information displayed on the report.

True or False

9. A trial balance will list all accounts and their balances for a business. This report will give you the Dr or Cr balance of these accounts; however, this report will not tell you if you entered the amounts in the correct accounts.

True or False

golddinosaur326

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 âeliminates theneed to a trained bookkeeper or accountantâ(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.âCash 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.â(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, âBecause 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 inventoryâ(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

yellowprairie-dog170

Roger Wilde is a CPA. He has numerous clients, one of which is Wedding World (WW). WW is a full service bridal consulting firm and is interested in buying Wedding Wonders Photography Studio (WWPS). WWPS uses the cash basis of accounting. Roger has been retained to help WW acquire WWPS, and you are a staff accountant working for Roger. Begin by evaluating the following facts for June.

Revenues WWPS provides a complete wedding-day package for $2,950. The package requires a $1,000 down payment at the time the contract is signed, a $1,200 payment on the date of the wedding, and a final $750 payment 30 days after the wedding. The company uses a mobile digital processing lab and is able to deliver a complete wedding portfolio at the close of the reception on the wedding day itself! Seventy-five weddings were photographed during June. All of these events were booked in earlier months. During June, an additional 92 weddings were booked for future months. Final payments were received during June for 47 weddings performed in May. None of the June weddings resulted in the receipt of the final payment before July 1, but full payment is expected.

Expenses During June $70,000 was actually paid for wages. Accrued wages at the beginning of the month totaled $12,000. At the end of the month, $23,000 was owed to employees. At the close of June, the WWPS bought new photography equipment for $13,000. Entering June, WWPS owned equipment with a total cost of $700,000. This equipment has an average life of 50 months. Supplies on hand at the beginning of the month totaled $123,500 and $76,000 was expended for supplies during the month. Supplies on hand were $81,200 at the end of the month.

(a) Prepare a cash basis income statement for June. Preliminarily, WW is willing to pay a price equal to 75 X Juneâs monthly income.

(b) On further review of the facts relating to WWPS, Roger suggested that a fair offer should be based on accrual basis income. Calculate accrual basis income.

(c) What is the proposed purchase price? What is the value of utilizing a CPA to assist in the business decision process?

(d) As a general rule, could a CPA like Roger give an unqualified audit opinion on the cash basis financial statements? Why or why not?

(e) Why might some businesses that are not required to follow GAAP use the cash basis?

(f) What is the modified cash basis of accounting? I-03.07 Cash and accrual-basis

pinkelk556

ADM 1340 Lecture Notes - Lecture 3: Current Liability, Matching Principle, Financial Statement

ADM 1340 Full Course Notes

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