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ysjd.patel
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Posted: 30 Apr 2010 at 22:04 \| IP Logged

Class Corp. maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for 1992. The following information pertains to Class's operations for the years ended December 31, 1992 and 1991:

1992 &n bsp; 1991

Accounts receivable &n bsp; $40,000 ; $20,000

Accounts payable ; 15,000 30,000

Under the accrual method, what amount of income before taxes should Class report in its December 31,

1992, income statement?

a. $25,000

b. $55,000

c. $65,000

d. $95,000

Can anyone let me know the approach to this type of question?

danion8
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Posted: 01 May 2010 at 10:46 \| IP Logged

Not to be mean but this question has been discussed on this forum several times before click on the search button at the top of the screen and type accounts receivable, you will find it there.

phung80219
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Posted: 01 May 2010 at 16:30 \| IP Logged

I think the solution is this:

Cash basis pretax income is 60,000.

+ 20,000
A/R increased by 20,000. A/R increased means that sales
occurred but not yet collected. The company will get
that money later (Accrual says... income when services
rendered.. not when collected).

+ 15,000
Because A/P decreased by 15,000. (X1 was 30,000, X2 was
15,000 therefore a decrease of 15,000). A decrease in
A/P means that the company paid cash to its vendors for
expenses incurred in the past. So the 15,000 paid in X2
was for expenses occurred in X1 or prior. Accrual basis
says expenses when incurred.

Summary:
cash basis pretax income 60,000
+ 20,000 sales but not yet collected
+ 15,000 for payment of expenses incurred in prior years
= 95,000.

Hope that makes sense.

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ysjd.patel
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Posted: 01 May 2010 at 16:43 \| IP Logged

thanx for great explaination....phung

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