Question

1) Explain accrual accounting principle. Give an example of a non-cash expense.

2) Bike-With-Us Corporation is a specialty bicycle parts replacement venture. The two entrepreneurs there borrowed $50,000 from members of their families and each put up $30,000 in equity capital. Retail space was rented and $60,000 was spent for fixtures and store equipment. Following are the abbreviated income statement and balance sheet information for after one complete year of operation.

BIKE-WITH-US CORPORATION

Sales	$325,000
Operating Costs	$285,000
Depreciation	$10,000
Interest	$5,000
Taxes	$6,000
Cash	$1,000
Receivables	$30,000
Inventories	$50,000
Fixed Assets, Net	$50,000
Payables	$11,000
Accruals	$10,000
Long-term loan	$50,000
Common Equity	$50,000

a) Prepare an income statement

b) Prepare a balance sheet.

3) A new business venture is expecting the followings:

Revenues = $5,000,000

Cost of Goods Sold = $3,000,000

Administrative Expenses = $1,000,000

Marketing Expenses = $200,000

Depreciation Expenses = $100,000

Interest Expenses = $50,000

Tax Rate = 25%

Calculate:

a) Variable Cost Revenue Ratio (VCRR)

b) Cash Fixed Costs (CFC)

c) Total operating fixed costs (TOFC)

d) EBDAT and Survival Revenues (SR) breakeven level

e) NOPAT and Operating breakeven revenues (NR) level

Answer 1

(1)Accrual concept :

According to Generally Accepted Accounting Principles (GAAP), accrual concept is one of the fundamental accounting principles for which no need to disclose in financial statements when accrual principle is followed. However when it is not followed entity should be disclose the fact and reasons for deviation.

Accrual principle is paired with matching concept which tells us that the revenues of one period should match with the costs of the same period. It means entity should recognise all revenues earned in a particular period (generally for a accounting year) irrespective of cash inflows and recognise all expenses or costs incurred in same period.

(2)(3)