On Jan. 1, XYZ started a new business. The shareholders made an initial cash inv

Question

On Jan. 1, XYZ started a new business. The shareholders made an initial cash investment of $1,000,000. During the year, the company provided $10,500,000 of services to customers. On December 31, XYZ had a balance in Accounts Receivable of $1,200,000. Also, during the year, the company incurred expenses of $8,800,000, and ended the year with a balance in Accounts Payable of $920,000. What is XYZ's income before income taxes for the year, under the Cash and the Accrual basis?

A. Cash Basis: $9,300,000 Accrual Basis: $10,500,000

B. Cash Basis: $1,700,000 Accrual Basis: $1,420,000

C. Cash Basis: $1,420,000 Accrual Basis: $1,700,000

D. Cash Basis: $500,000 Accrual Basis: $2,620,000

Explanation / Answer

B. Cash Basis: $1,700,000 Accrual Basis: $1,420,000

Workings:

Accrual basis accounting Sales $ 105,00,000 Less: expenses $   88,00,000 Income before tax $   17,00,000 Cash basis Accounting Sales $ 105,00,000 Less: accounts receivable $   12,00,000 Cash sales $ 93,00,000 Less: cash expenses Expense $   88,00,000 less: accounts payable $      9,20,000 $ 78,80,000 Income before tax $ 14,20,000

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