Question

LG 4 P1-2 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 2009, 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 1

A: Using Accrual accounting

Revenue as per Bill book = 760000

Less: Acquiring costs=300000

Net Income = $460000

B: Using Cash accounting

Revenue as per Cash book = 690000

Less: Acquiring costs=300000

Net Income =$390000

C: the accrual accounting is more useful to financial managers. This is because all the revenues are managed with the expenses. This gives the true and fair picture of the state of affairs and the performance of the business.