1. Prepared by: Gabriela H. Schneider, CMA; Grant MacEwan College INTERMEDIATE ACCOUNTING INTERMEDIATE ACCOUNTING Sixth Canadian Edition KIESO, WEYGANDT, WARFIELD, IRVINE, SILVESTER, YOUNG, WIECEK

2. C H A P T E R 3 Appendix 3B Cash Basis Accounting versus Accrual Basis Accounting

3. 1.Differentiate the cash basis of accounting from the accrual basis of accounting. Learning Objectives

4. Cash Basis and Accrual Basis The cash basis considers only cash receipts and cash payments for the year As a result, both the Revenue Recognition and the Matching Principle are ignored Cash basis financial statements do not conform to GAAP Accrual basis considers revenues when earned and expenses when consumed in determining net income

5. Cash and Accrual Basis: Example Johnson Company, a retailer, starts operations on January 1, 2000, and reports the following information: Sales, $200,000 (20% cash and 80% credit) Accounts Receivable end of year: $16,000 Purchases, $120,000 (30% cash and 70% credit) Accounts Payable end of year: $8,200 Depreciation expense for 2000: $3,450 Ending inventory of goods:$12,000

6. Accrual Basis: Example Sales Revenue: Cash sales$ 40,000 Credit sales: 160,000 Net Sales $200,000 Cost of Goods Sold: Purchases$ 120,000 less: Ending inventory 12,000 108,000 Gross Profit 92,000 Less: Depreciation Expense 3,450 Income Before Taxes $ 88,550

7. Cash Basis Cash Receipts: Cash sales $ 40,000 Collections from credit sales: Credit sales: $160,000 Less: Accounts. Receivable.: 16,000 144,000 Net Cash Revenue $184,000 Cash Payments: Cash Purchases $ 36,000 Payments to vendors on account: Credit purchases: $84,000 less: Accounts Payable: 8,200 75,800 Net Cash Expenses $ 111,800 Excess of Collections over Receipts $ 72,200

8. Reconciliation of Cash and Accrual Base Income Accrual Base Income:$ 88,550 Add: Non-cash charge Depreciation 3,450 92,000 Less:Uncollected revenue $16,000 Unpaid purchases 3,800 19,800 Excess of collections over payments$ 72,200

9. Reconciling Cash Basis Receipts with Accrual Revenue Cash received from customers Adjustments - Beginning Accounts Receivable + Ending Accounts Receivable + Beginning Unearned Revenue - Ending Unearned Revenue Accrual Based Revenue

10. Reconciling Cash Basis Payments with Accrual Expenses Cash paid for operating expenses Adjustments + Beginning Prepaid Expenses - Ending Prepaid Expenses - Beginning Accrued Liabilities + Ending Accrued Liabilities Accrual Based Expenses

11. Cash Basis Weaknesses Current economy is largely credit-based Information on future cash flow commitments is crucial to investors and creditors Cash basis accounting does not provide information on future cash flows

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