Accrual Accounting
Accrual Accounting
Exercises
- (AACSB) Analysis
To
earn money to pay some college expenses, you ran a lawn-mowing business
during the summer. Before heading to college at the end of August, you
wanted to find out how much money you earned for the summer.
Fortunately, you kept good accounting records. During the summer, you
charged customers a total of $5,000 for cutting lawns (which includes
$500 still owed to you by one of your biggest customers). You paid out
$1,000 for gasoline, lawn mower repairs, and other expenses, including
$100 for a lawn mower tune-up that you haven't paid for yet. You decided
to prepare an income statement to see how you did. Because you couldn't
decide whether you should prepare a cash-basis statement or an accrual
statement, you prepared both. What was your income under each approach?
Which method (cash-basis or accrual) more accurately reflects the income
that you earned during the summer? Why?
- (AACSB) Analysis
Identify
the categories used on a classified balance sheet to report assets and
liabilities. How do you determine what goes into each category? Why
would a banker considering a loan to your company want to know whether
an asset or liability is current or long-term?
- (AACSB) Analysis
You
review a company's statement of cash flows and find that cash inflows
from operations are $150,000, net outflows from investing are $80,000,
and net inflows from financing are $60,000. Did the company's cash
balance increase or decrease for the year? By what amount? What types of
activities would you find under the category investing activities?
Under financing activities? If you had access to the company's income
statement and balance sheet, why would you be interested in reviewing
its statement of cash flows? What additional information can you gather
from the statement of cash flows?