During the month of April, Simpson Co had cash receipts from customers of $170,000. Expenses totaled $156,000, and accrual basis net income was $42,000. There were no gains or losses during the month.

Question 1: Calculate the revenues for Simpson Co. for April.

Was I suppose to throw out $170,000?

Question 2: Explain why cash receipts from customers can be different from revenues.



Thanks very much.

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Originally Posted by pphan

Was I suppose to throw out $170,000?

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Yes. Revenues - expenses = net income. You have two of the three numbers and can solve for the third.

The $170,000 is only what was collected in cash, not what the revenues were. The answer to #2 is why. Do you know #2?

Thanks for the clue for #1. #2 answer I think is Cash receipts are ready cash but revenues can be in other forms like account receivable where the money is owed to the company but not in cash form. Is this correct or not even close?

You're mixing up the difference between the revenues themselves, and the asset you get of value in exchange for the revenue. Revenue isn't cash or receivables either one. Revenue is revenue. Cash and receivables are assets. So they aren't the same thing, but earning isn't exactly worth much of anything if you don't end up receiving something for it - but it's an exchange of you doing something to earn, and them giving you an asset of some sort. (Theoretically, they could do work in exchange and you'd still have revenue.)

Though you do have the right idea that receivables counts because it's owed to the company. But that really only defines it as an asset. You can have a receivable that is not related to revenue at all. (For instance, lending someone money creates a receivable but not a revenue.) So both cash and receivables are assets, cash because you have it and receivables because it represents "future cash," something that you have claim on.

Now - revenue in an accrued basis is what you have earned. To earn, you must have completed some service, delivered goods, etc. and what you get in exchange for it (asset) must be realized or realizable. (To realize means you got it, but realizable means you can get it and it's due, hence, receivables.) And it's revenue when it's earned and not necessarily when it's paid.

On a cash basis, it's revenue when you receive the cash. You still must have or will earn it. i.e. you still can't count it as revenue if it's not an earnable thing, but you count it when the cash is received, rather than when it's earned.

Have I confused you sufficiently yet? (I like to straighten out the misconception that revenue is cash - no, cash is an asset.)

Now after all that jibberish, it comes down to the fact that there can be revenues when there's no cash because revenues are recorded when earned and not necessarily at the same time as when the cash is received.