M3-2 Reporting Cash Basis versus Accrual Basis Income: LO1, LO2
Mostert Music Company had the following transactions in March:
1. Sold instruments to customers for $10,000; received $6,000 in cash and the rest on account.
The cost of the instruments was $7,000.
2. Purchased $4,000 of new instruments inventory; paid $1,000 in cash and owed the rest on account.
3. Paid $600 in wages for the month.
4. Received a $200 bill for utilities that will be paid in April.
5. Received $1,000 from customers as deposits on orders of new instruments to be sold to the customers in April.
Complete the following statements:
FAST FLASHBACK
Cash basis accounting records revenues when cash is received and expenses when cash is paid. Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments.
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M3-2 Reporting Cash Basis versus Accrual Basis Income: LO1, LO2
O'Shea Enterprises started the 2002 accounting period with $30,000 of assets (all cash), $18,000 of liabilities, and $4,000 of common stock. During the year, O'Shea earned cash revenues of $48,000, paid cash expenses of $32,000, and paid a cash dividend to stockholders of $2,000. O'Shea also acquired $10,000 of additional cash from the sale of common stock and paid $6,000 cash to reduce the liability owed to a bank.
CHECK FIGURES
a. Net Income: $16,000
b. Total Assets: $48,000
Required
1. Prepare an income statement, statement of changes in stockholders' equity, period-end balance sheet, and statement of cash flows for the 2002 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)
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Fundamentals of Financial Accounting 1st ed. By Phillips, Libby, and Libby
3. The matching principle controls
(a) Where on the income statement expenses should be presented.
(b) How costs are allocated between Cost of Goods Sold (sometimes called Cost of Sales) and general and administrative expenses.
(c) The ordering of current assets and current liabilities on the balance sheet.
(d) When costs are recognized as expenses on the income statement
4. Which of the following would not be considered a recurring item on the income statement?
(a) Administrative expenses.
(b) Sales revenues.
(c) Selling expenses.
(d) Loss on disposal of a business division.
