WORKSHOP 7 ADDITIONAL QUESTION 6.33 PREPARING AN ACCRUAL BASED STATEMENT Racey h

Question

WORKSHOP 7 ADDITIONAL QUESTION 6.33 PREPARING AN ACCRUAL BASED STATEMENT Racey has prepared an income statement for the 12-month reporting period ended 30 June on a cash basis, showing a $43 200 profit. The cash-based statement shows the following: Sales Inventory purchased Gross profit $277 400 164 000 113 400 28 400 9 200 3 440 5 600 18 800 4 760 Salary and wages Rent Administration Interest The accounts receivable and accounts payable balances at the start of the reporting period were receivable of $21 200 and accounts payable of $19 760. ADDITIONAL INFORMATION $16 400 and $9800 respectively. At the end of the reporting period, Racey had accounts .The opening inventory was $32 000 and the closing inventory $38 000. . An advertising invoice of $2 960 had not been paid. .The business has equipment that cost $40 400. It has a useful life of five years and an expected trade-in value of $4 400. The insurance expense represents the 12-month premium on a policy that was taken out on 30 April. REQUIRED: 1. Prepare an accrual-based income statement for Racey for the period ended 30 June. 2. As a user of financial statements, critique why accrual accounting is preferred to cash accounting to measure financial performance. WORKSHOP 7 PRESENTATION QUESTION atio ADDITIONAL INFORMATION The apprentice is paid $500 a week. He is owed two weeks wages. The business has use of a motor vehicle purchased 1 January 2017, at a cost of $32,000. It has an expected life of 4 years and an estimated trade-in value of $4,000. Straight-line depreciation is used. 6. 7. . Supplies on hand 30 June 2017 were valued at $5,500 EQUIRED What is 'Depreciation'? How is Depreciation Expense different from Accumulated Depreciation? Show the Balance Day Adjustments required to record the additional information shown in point 6,7 and 8 in a worksheet format. Explain why each adjustment is necessary Prepare an Income Statement and Balance Sheet for Corporate Catering.

Explanation / Answer

QUESTION - 6.33

PART 1 - Prepare an accrual-­?based income statement for Racey for the period ended 30 June.

PART 2 --- Now as a user of financial statements, we can say that accrual basis of accounting is more benefinical than cash basis of accounting because it recognises income and expenses when they occur, rather than when the cash has been paid or received.Cash accounting is not satisfactory for measuring performance during a reporting period as the cash received (paid) may not correspond to the income earned (expenses incurred).

For example, in Racey’s case, Racey has paid for a one-year insurance policy which was only used for 2 months at the end of the accounting period. Recognising the whole amount of insurance paid does not reflect the real expense incurred during the period, which is only 2 out of 12 month premium that has been paid.

Depreciation expense is another example that causes the difference between cash-based profit and accrual-based profit. As depreciation expense is a non-cash item, it will not be included in the determination of cash-based profit even though it reflects the expense incurred by Racey to account for the equipment’s future economic benefits that have been used up during the accounting period.

RACEY Income Statement For the 12-month reporting period ended 30 June Cash Basis Adjustment Accrual Basis Sales 277 400 + 4 800 282200 Inventory Purchased 164000 + 32 000 167960 + 9 960 -38000 GROSS PROFIT 113400 114240 Less expenses Salary and wages 28400 28400 Rent 9200 9200 Insurance 3440 -2867 573 Advertising 5 600 + 2 960 8 560 Depriciation 0 + 7 200 7200 Administartion 18800 18800 Interest 4760 4760 PROFIT 43200 36747

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