Question

BizCon, a consulting firm, has just completed its first year of operations. The com- pany’s sales growth was explosive. To encourage clients to hire its services, BizCon offered 180-day financing—meaning its largest customers do not pay for nearly 6 months. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year, BizCon owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year.

(a) Explain how cash and accrual accounting would differ for each of the events listed above and describe the proper accrual accounting.

(b) Assume that at the end of the year, BizCon reported a favorable net income, yet the company’s management is concerned because the company is very short of cash. Explain how BizCon could have positive net income and yet run out of cash.

Answer 1

Solution:

Given that:

To urge or encourage customers to contract its administrations or services Bizcon offered - 180 day financing.

Insurance is paid for -2 year.

a)

• We realize that when the physical money is moved we will perceive the entry and that entry isn't express the financial situation of the activity's or operation's effectively .This is only when we follow cash based accounting.
• However, ,one this will state exact financial situation of the activity that is by accural basis money receipt or cash receipt and payment are not considered for perceiving entry and any place the liability brings about or when the asset is accured for us at that point, the accurate financial states is perceived or recognized.
• From the given question in that we can say here the present year profit is increases by diminishing the present year costs .But according to accural basis the compensation in one year from now the liabilities has been caused in the present year and perceived or recognized in current year.
• For the above exchanges or transactions all are recorded in books as accounts these are sales right now all receivable in this year costs additionally to be reserved in current year.

b)

• In the question there are a half year credit .There will be short money issue currently ,to perform we need to make the profit on each sale and keep up the non receipt money from client's after sale because of a half year time period short cash is appeared .But in future by diminishing a half year duration we will get more cash.