Accounting & Finance Club Meeting Lecture Topic: Cash V.s. Accrual Basis By TJ Wang, Ph.D. January 28, 2010

Cash Basis Accounting Simple and easy to follow – Revenue and Expenses follow cash flows (i.e., realization). Income = Net Operating Cash Flow IRS accepts Used to be the norm for small businesses

Cash Basis Accounting - Restrictions Gross Receipts Qualification Test Ave. C/R (prior 3 yrs) < $1M (i.e., Revenue Procedure) Regulation : Supplies Capitalization Requirement Conformity Requirement

Timeline of Exchanges Company Others Products, Services, Cash, etc.

Timeline of Exchanges (Cont) Company Others Fiscal Year-EndProducts, Services, Cash, etc. Delivered/received Used/expired Earned

Accrual Basis Accounting Allow consistent evaluations and comparisons of companies’ performances Consistent with Matching Principle (Revenues ↔ Expenses)

t - i t + i 1 t and Time Pattern Accruals of expected future operating cash flows (as defined in SFAS 95) Deferrals of past operating cash flows (as defined in SFAS 95) Terms Operating cash flows of future deferrals Operating cash flows of past accruals Accruals of current operating cash flows Operating Cash flows of current deferrals $ $ $ $ $ $ $ $ Effects of Timing on Transactions

Example Services rendered to customer for $17,000, of which $10,000 was received in cash and the rest was provided on credit and not collected by the end of the period.

Example (Cont.) Services partially performed to customer worth about $1,000. The customer prepaid $2,000 in the prior period.

Example (Cont.) Collected $2,500 in accounts receivable arising from services provided in a prior period.