Essay 1O points Page 12 You are hired as the accountant for Bergen Bakery. On yo
ID: 2509189 • Letter: E
Question
Essay 1O points Page 12 You are hired as the accountant for Bergen Bakery. On your first day on the job, you quickly notice that their balance sheet has no accounts receivable or accounts payable. You ask the owner if she has any amounts due from customers or any amounts owed to suppliers. She says of course we do but we don't count revenue until we get paid and we don't count expens until we write the checks. It's easier to just do our financial statements on a cash basis. Explain to her why the accrual basis of accounting would allow her financial statements to be more useful.Explanation / Answer
The Financial Statements of an entity should give a true and fair view of financial position of the entity.
The Income Statement for a period should recognize all the revenues earned during the period and all the expenses involved in earning the revenue.
If we count revenues and expenses on cash basis, all the revenues earned during the periods may not be recognized and revenue of some other period may be recognized in the reporting period. Similarly, the expenses will not reflect the expenses involved in earning the revenue of the period. This will give erroneous information about income.
The Balance sheet will also not reflect true and fair view of the financial position of the company.
For example, if all there is all credit sales during a year and the receivables increase during a year, the income statement will show lower income and the Balance sheet will not reflect the receivables as assets.
With financial Statements not showing true and fair view of financial position, the management’s steering function of the entity will suffer. The investors and other users of the financial statements will take wrong decisions based on the financial statements.
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