Cash-Basis and Accrual-Basis Accounting The records of Summers Building Company

Question

Cash-Basis and Accrual-Basis Accounting The records of Summers Building Company reveal the following information for 2011. Cash receipts during 2011 (including $50,000 paid by stockholders in exchange for common stock) were $278,300. Cash payments during 2011 (including $7,600 of dividends paid to stockholders) were $164,850. Total selling price of services billed to customers during 2011 was $201,800. Salaries earned by employees during 2011 were $116,320. Cost of supplies used during 2011 in operation of the business was $47,480. Required: 1. Calculate Summers Building Company's net income for 2011 on an accrual basis. $ 430,100 2. Calculate Summers Building Company's net income for 2011 on a cash-basis. $ 3. Explain how the cash-basis of accounting allows for the manipulation of income.

Explanation / Answer

1)

2)

3)

Under cash basis of accounting ,income is taxable in the year cash is received or paid (not in the year in which income is earned or incurred) .therefore it does not show the actual amount of revenue earned or expenses incurred during the period . If any trader wants to show higher profit, it will show less cash expenses or higher cash receipts resulting in fluctuating profit .

Income statement (Accrual Basis) Service revenue 201800 lesS: salaries expense (116320) supplies expense (47480) Net Income 38000

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