Name :: anuradha gupta
Your Country :: india
Explain your question in detail :: Southern Cross printing company prepares
its income statement on a cash basis:
Sales $100,000
Less: inventory purchases 30,000
________
Gross profit 70,000
Less expenses:
Salary and wages 20,000
Rent 15,000
Insurance 2,000
Advertising 3,000
Other 4,000
______
Total expenses 44,000
_______
Net profit 26,000
=======
On further investigation you have found the following accrual balances:
Beginning End
Accounts receivable 6,000 1,500
Accounts payable (for inventory) 700 4,100
Inventory 8,400 6,500
Prepaid rent 3,000 1,200
Prepaid insurance 800 1,000
Accrued advertising Nil 600
Furthermore, there should be depreciation of plant and equipment of $2,400
and bad and doubtful debts of $300.
Required:
Prepare an accrual-based income statement explain the difference between
accrual and cash based income statements and why accrual income statement
is more useful?
Category :: Teaching
Answer : You should know first the basics of accrual and cash based income statements. If we will add outstanding expenses in the end time in same year expenses and outstanding incomes will add in same year incomes. Except this, if we deduct prepaid expenses (end) from same year expenses and we will deduct advance income at end time from income, then this will be accrual based income statement. You should also add credit purchase and credit sale in cash sale and cash purchase. If we will not do this adjustment, then it will cash basis income statement.
Now, we come on your question.
Sales $100,000
+ Credit Sale Value ( you have to calculate it by opening debtors - cash payment - closing value of debtor)
Less: { inventory purchases 30,000 + credit purchase (( you have to calculate it by opening debtors - cash payment - closing value of debtor)}
________
Gross profit ( it will be different)
Less expenses:
Salary and wages 20,000
Rent 15,000 ( add prepaid rent opening balance and deduct prepaid rent closing balance)
Insurance 2,000 (add prepaid insurance of opening balance and deduct prepaid insurance closing balance )
Advertising 3,000 ( Less opening balance of accrued advertising and Add closing balance of accrued advertising.
Other 4,000
______
Total expenses ( it will be different)
_______
Net profit ( It will be different)
=======
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