P1–2 Accrual income versus cash flow for a period Thomas Book Sales, Inc., suppl
ID: 2650579 • Letter: P
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
Solution:
A)
Inputs:
Sales
$760,000
Cost of Goods sold
$300,000
Net Profit
$460,000
B)
Inputs:
Sales
$690,000
Cost of Goods sold
$300,000
Net Profit
$390,000
C) Both are useful. Accrual method is a more accurate for operations and it follows GAAP. Managerial accounting does not require to follow GAAP and cash accounting method tells the manager that what is expected from the cash flow.
Inputs:
Sales
$760,000
Cost of Goods sold
$300,000
Net Profit
$460,000
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