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I’m having difficulties figuring out whether to add or subtract certain accounts (A/P, A/R, Prepaid, etc.) when I’m converting from cash to accrual basis or vice versa. The nice lady in the CPAexcel lecture videos has t-accounts and equations but I still have difficulty applying them myself when I’m doing exam questions over the topic. For example:
“Class Corp. maintains its accounting records on the cash basis, but it restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for 20X2. The following information pertains to Class operations for the years ended December 31, 20X2 and 20X1:
20X2 20X1
Accounts receivable $40,000 $20,000
Accounts payable 15,000 30,000Under the accrual method, what amount of income before taxes should Class report in its December 31, 20X2, Income Statement?”
The answer is $95,000 (60+21+15) but I pick $65,000 every time because I think that there is extra cash flow since A/R decreased $20,000 during the year, then the company paid out $15,000 in payables.
Another one I’m doing like that is this:
“Reid Partners, Ltd., which began operations on January 1, 20X3, has elected to use cash-basis accounting for tax purposes and accrual-basis accounting for its financial statements. Reid reported sales of $175,000 and $80,000 in its tax returns for the years ended December 31, 20X4 and 20X3, respectively. Reid reported accounts receivable of $30,000 and $50,000 in its Balance Sheets as of December 31, 20X4 and 20X3, respectively.
What amount should Reid report as sales in its Income Statement for the year ended December 31, 20X4?”
The answer is $155,000 but I keep picking $195,000.
Any suggestions on helping me fix this bug in my head?
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I cannot believe I am done.
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