Asked by Genesis Hernandez on May 07, 2024
Verified
In its first year of operations,Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers) ; Incurred expenses of $35,000 ($31,000 cash paid toward them) ; Prepaid $8,000 cash for costs that will not be expensed until next year.Net income under the cash basis of accounting is:
A) $17,000.
B) $21,000.
C) $13,000.
D) $25,000.
E) None of the answer choices is correct.
Cash Basis
An accounting method where revenues and expenses are recorded only when cash is received or paid, respectively.
Earned Revenues
Income generated from the normal business operations after the delivery of goods or services to customers.
Prepaid Costs
Expenses paid in advance for goods or services to be received in the future, recorded as assets until they are consumed.
- Comprehend the essential elements of accrual basis accounting, such as revenue recognition and the execution of matching principles.
- Recognize and delineate the need for adjustment entries and their impact upon the accounting equation.
Verified Answer
NR
NRahayu RahimMay 10, 2024
Final Answer :
C
Explanation :
Under the cash basis of accounting, revenues are recognized when cash is received and expenses are recognized when cash is paid. Therefore, Grace Company would recognize $52,000 in revenue (cash received from customers) and $31,000 in expenses (cash paid towards them) in its first year of operations.
Net income = Revenues - Expenses
Net income = $52,000 - $31,000
Net income = $21,000
However, the company also prepaid $8,000 for costs that will not be expensed until next year. This expense cannot be recognized in the current year under the cash basis of accounting.
Therefore, the net income under the cash basis of accounting is:
$21,000 (revenues - expenses) - $8,000 (prepaid expense) = $13,000.
Thus, the correct answer is C) $13,000.
Net income = Revenues - Expenses
Net income = $52,000 - $31,000
Net income = $21,000
However, the company also prepaid $8,000 for costs that will not be expensed until next year. This expense cannot be recognized in the current year under the cash basis of accounting.
Therefore, the net income under the cash basis of accounting is:
$21,000 (revenues - expenses) - $8,000 (prepaid expense) = $13,000.
Thus, the correct answer is C) $13,000.
Learning Objectives
- Comprehend the essential elements of accrual basis accounting, such as revenue recognition and the execution of matching principles.
- Recognize and delineate the need for adjustment entries and their impact upon the accounting equation.