| Author |
|
CayG
Contributor
Joined: 14 Jan 2009
Location: United States
Online Status: Offline
Posts: 51
|
| Posted: 15 Sep 2009 at 22:02 | IP Logged
|
|
|
Can someone please explain the below question:
Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of:
Accounts Receivable Accrued Expenses
d. No Yes
The above is the correct answer but I don't understand why.
__________________
B 76,81
A 81
R 75
F 75
Becker Self Study - Becker Final Review - Becker Flash Cards
|
| Back to Top |
|
| |
Zeratul
Major Contributor
Joined: 11 Jun 2009
Online Status: Offline
Posts: 987
|
| Posted: 15 Sep 2009 at 22:22 | IP Logged
|
|
|
Please search the FAR forums. This question has been asked and answered numerous times.
|
| Back to Top |
|
| |
bryris
Major Contributor
Joined: 07 Dec 2008
Location: United States
Online Status: Offline
Posts: 624
|
| Posted: 15 Sep 2009 at 22:23 | IP Logged
|
|
|
I'll try - for our mutual benefit.
A/R goes down when cash is collected on credit sales. Under accrual, this income has already been recognized. Thus, collecting the cash does nothing further for you.
Under cash, these collections are income. Thus the cash method DOES NOT understate income when receivables go down as compared to the accrual method. In fact, it reports income with every decrease, whereas the accrual does not.
Accrued expenses reduce accrual income when incurred, whereas cash reduces income when paid. Therefore, with a net decrease in accrued expense, accrual income is not affected, but cash basis income is reduced. Thus, it DOES understate income as compared to accrual.
This question is almost like the "double negative" we try to avoid in grammar. Takes a while to think about. In fact, I am still sort of scratching my head, but I think everything I've said is right.
Let me know if a light bulb goes off.
If you find something else in the searches, as Z recommended, do post up a link.
__________________
REG - 97
FAR - 97
BEC - 90
AUD - 97
|
| Back to Top |
|
| |
Zeratul
Major Contributor
Joined: 11 Jun 2009
Online Status: Offline
Posts: 987
|
| Posted: 15 Sep 2009 at 22:29 | IP Logged
|
|
|
I hope I haven't been unhelpful. This question seems to pop up every two weeks.
|
| Back to Top |
|
| |
bryris
Major Contributor
Joined: 07 Dec 2008
Location: United States
Online Status: Offline
Posts: 624
|
| Posted: 15 Sep 2009 at 22:33 | IP Logged
|
|
|
You're right on Z. I did a search myself and found some flaws in my answer. I *think* I've corrected them.
__________________
REG - 97
FAR - 97
BEC - 90
AUD - 97
|
| Back to Top |
|
| |
Active Topics 
Memberlist 
Search 
Help
Register 
Login
Topic: Accrual vs Cash basis
Topic Closed)
