P1–2 Accrual income versus cash flow for a period Thomas Book Sales, Inc., suppl

Question

P1–2 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 financial manager? Why?

Explanation / Answer

a) Net profit       =Sales-cost of goods sold
                        =$760,000-$300,000
                        =$460,000

b) Net Cash flow =Cash receipts-Cost of goods sold
                         =$6,90,000-$3,00,000
                         =$3,90,000

c) Accruals method is useful as most realistic

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