Brown Corporation had consistently reported its income by the cash method. The c

Question

Brown Corporation had consistently reported its income by the cash method. The corporation should have used the accrual method because inventories are material to the business. In 2012, Brown filed a request to change to the accrual method on time. At the beginning of 2012, Brown had accounts receivable of $60,000. Also, Brown had merchandise on hand with a cost of $80,000 and accounts payable for merchandise of $25,000. The accounts receivable, inventory, and accounts payable balances per books were zero. Determine the adjustment to income due to the change in accounting method and the amount that is allocated to 2012.

Explanation / Answer

Accounts receivable ( increases revenue) 60000 Inventory on Hand reduces cost 80000 Accounts payable ( increases cost) -25000 Net impact on income 115000 Hence the opening net income of 2012 will increase by $ 115000

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