You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners,Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardwarestore. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrualbased financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He doesn’t see thepurpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cashfrom customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show mybuilding and equipment as assets and depreciate them. I just don’t understand the problem.”Required:1. Explain the difference between a cash basis and an accrual basis measure of performance.2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting
You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners,
Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardware
store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual
based financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He doesn’t see the
purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash
from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my
building and equipment as assets and depreciate them. I just don’t understand the problem.”
Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.
2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
3. Explain the purpose of
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
