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.

Instructions

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

2. (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

Answer - Given that i- TO Encourage clients to hide its services Bizcon offered - 180 day fanancing Insurance is paid for a year. a) we know that when the physical cash is moved love coil geconize the Entory ant And that Entry is not state the financial position of the operation's covectly. this is nothing but when we follow cash based accounting → But, one this will state accurate financial Position of the operation that is by accural basis Cash recipt and payment are not considered for recognizing Enfay and whenever the liability incuvis or when the asset is accured for us ther, the accurate financial States is geognized

→ from the given question in that we can say here the current year profit is increases by decreasing the current year Expenses But as per accusual basis the pay in next year the liabilities has been incurred in the Current year and recognized in Current year. > for the above transactions all books as accounts there are year and all receivable in Expenses also to be booked are recorded in sales tee in this this year and in Current year. b) En the question there are 6 moths Caredit perioud. there will be shat cash problem now, to perform betterly we have to make the porofit on every Sale and maintain the .. non receiptable Cash from Coustriea's after sale due to 6 months period' shof Cast is. appeared But in future by reducing 6 months period we will get more money