Assignment
Judgment Case: Cash versus accrual accounting; adjusting entries
You have recently been hired by Davis & Company, a small public accounting firm. One of the firm's partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city's largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company's records on a cash basis. He doesn't see the purpose of accrual based statements. His most recent outburst went something like this: "After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and depreciate them. I just don't understand the problem."
Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.
2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.