Problem
Cash vs. Accrual
1) Judgment Case
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 does not 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."
Task:
• Explain the difference between a cash basis and an accrual basis measure of performance.
• Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
• Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.
2) Judgment Case
You recently joined the auditing staff of Best, Best, and Krug, CPAs. You have been assigned to the audit of Clearview, Inc., and have been asked by the audit senior to examine the balance sheet prepared by Clearview's accountant.
Task
• Identify the items in the statement that most likely would require further disclosure either on the face of the statement or in a note. Further, identify those items that would require disclosure in the significant accounting policies note.
The response must include a reference list. Using Times New Roman 12 pnt font, double-space, one-inch margins, and APA style of writing and citatios.