Question

you have recently been hired by Smith & Jones, a small public accounting firm as an internal auditor. One of the firm's partners, Jeffrey Jones, has asked you to deal with an unhappy client. The client, Joan Silverberg, is the owner of the city's largest jewelry store, DiamondsRUs. Ms Silverberg wants to remodel her store and is applying for $300,000 loan with First National Bank. The bank requires the use of accrual basis accounting for financial statements. Ms Silverberg insists that she has always used cash basis accounting for her jewelry store. She does not see the purpose of using accrual basis accounting and refuses to make year-end adjusting entries.

Required:

Write a (friendly) short email to Ms Silverberg to include the following:

1. Proper Salutation

2. Introductory paragraph stating your name and job title at the firm. (You can make this up.)

3. Explain the main differences between cash basis and accrual basis accounting.

4. Explain why the FASB requires the use of the accrual basis accounting for financial external reporting and why it would be beneficial for her to switch to the accrual basis.

5. Closing sentence requesting to meet with her in person sometime next week.

Answer 1

Dear J Silverbeg,

Hope you are doing fine!

I am M , recently joined with Smith & Jones as an associaye, writing this to inform you that I will now be a part of the internal auditor’s team of DiamondsRus. Furthermore, I will be helping out with the requisites for application for your bank loan with the First national Bank.

Ma’am, I understand that bank requires you to submit the financials on accrual basis of accounting. Accrual basis of accounting is nothing but preparation of accounts on the basis on due basis where as cash basis means preparation of accounts as when there is a movement in cash due to any transaction.

Moreover, preparation of financials on accrual basis would be a best practice since the FASB’s recommends the same. Adoption of such method is beneficial so as to prepare the financials as per the matching principle concept.

I would like to have a personal meeting with you to discuss the above so that I can explain you in a better manner. We can have the meeting sometime in the next week as per your convenience.

Do let me know in case of any questions.

Thank you

M,

Associate

Smith & Jones