Cash-basis accounting and accrual-basis accounting


Problem:

On December 31, 2009, Matt Morgan completed the first year of operations for his new computer retail store. The following data were obtained from the company's accounting records:

Sales to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,000
Collections from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000
Interest earned and received on savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      2,500
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    98,500
Amounts paid to suppliers for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  103,000
Wages owed to employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      3,500
Wages paid to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    40,000
Utility bill owed: to be paid next month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       1,100
Interest due at 12/31 on loan to be paid in March of next year . . . . . . . . . . . . . . . . . . . . . .         1,200
Amount paid for one and one-half years' rent, beginning Jan. 1, 2009 . . . . . . . . . . . . . . . . .        17,500
Income taxes owed at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4,000

Question 1. How much net income (loss) should Matt report for the year ended December 31, 2009, according to (a) cash-basis accounting and (b) accrual-basis accounting?

Question 2. Which basis of accounting provides the better measure of operating results for Matt?

Solution Preview :

Prepared by a verified Expert
Accounting Basics: Cash-basis accounting and accrual-basis accounting
Reference No:- TGS01878871

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