Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies t
ID: 2773805 • Letter: A
Question
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 pro-viso 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?
*****ANSWER USING EXCEL, Important Note: You MUST include your computations and formulas as required.*****
Explanation / Answer
(a)Accrual Accounting
In the Accrual form of accounting revenue is recognized when it is earned and expenses when the bills are received. It does not consider when exactly the cash changed hands.
Total Books shipped and Billed(A)
7,60,000
Cost of Goods Sold (B)
3,00,000
Net Profit ( A - B)
4,60,000
(b) Cash Accounting
In cash accounting, entries are made when the cash actually goes out and when the cash actually comes in.
Total Cash Collections(A)
6,90,000
Cost of Goods Sold (B)
3,00,000
Net Profit ( A - B)
3,90,000
c) Which is better?
For finance manager accrual accounting is better and most companies follow this method because there can be exact match between the revenue and expense accounts
Total Books shipped and Billed(A)
7,60,000
Cost of Goods Sold (B)
3,00,000
Net Profit ( A - B)
4,60,000
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