Question

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 proviso

that they must be paid for within 30 days but can be returned for a full refund

credit within 90 days. In 2014, 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

recorded in firm's accounting records a) Under accrual accounting, transactions such as revenues and expenses are as and when they take place irrespective of collection or payment at the time of such transaction takes place. So, $760,000 Book titles shipped and billed -$300,000 Less: Amount spent to acquire the books shipped $460,000 Firm's net profit for the past year under accrual accounting b) Under cash basis accounting, transactions such as revenues and expenses are recorded in firm's accounting records only when they are collected or paid irrespective of time at which such transaction takes place. So, $690,000 Collections, net of return credits, during the year -$300,000 $390,000 Less: Amount spent to acquire the books shipped Firm's net profit for the past year under cash basis accounting c) Financial manager is a person whose primary responsibility is to plan firm's financial resources in terms of acquiring spending, distributing, investing, saving, etc. Therefore, as for as financial manager is concerned, he is more particular about availablity of cash and immediate cash commitments to be met. Keeping these aspects in mind, the cash basis statement is more useful to the financial manager because it exactly reflects cash available on hand for further use.