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ACC 305 Week 1 DQ 2 Cash versus Accrual and Financial Disclosures

ACC 305 Week 1 DQ 2 Cash versus Accrual and Financial Disclosures

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ACC 305 Week 1 DQ 2 Cash versus Accrual and Financial Disclosures

Judgment Case 2-1 (page 109)

You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He does not see the purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and depreciate them. I just don’t understand the problem.”

Required:

  •         Explain the difference between a cash basis and an accrual basis measure of performance.
  •         Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
  •        Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.

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