Accrual income versus cash flow for a period. Thomas Book Sales, Inc., supplies

Question

Accrual income versus cash flow for a period. Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2014, Thomas shipped and billed book titles totaling $760,000. Collections, net of return credits, during the year totaled $690,000. The company spent $300,000 acquiring the books that it shipped. a. Using accrual accounting and the preceding values, show the firm's net profit for the past year. b. Using cash accounting and the preceding values, show the firm's net cash flow for the past year. c. Which of these statements is more useful to the financil manager? Why?

Explanation / Answer

a. Calculation of net profit using accrual accounting:

Accrured Reveue (Sales ) = $760000

Less: Accrured Expenses $300000

Net income = $460000

b.

Calculation of net profit using cash accounting:

Cash Collcetion = $690000

Less: Cash paid for Expenses $300000

Net income = $390000

c. For financial manager cash baisis is usefull as he might need the find positions for the analysis.

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