[harris016]

Please help me understand this example.

I am given a number for accrual based net income….lets say 100. and ask me to come up with cash based NI

Then they say AP decreased by 15 and AR increased by 20

The answer would be to deduct both of them from the 100

I understand the AR as accrual based would recognize that 20 as revenue but no cash has been collected.

The explanation for adding the AP is confusing. It states decrease in accounts payable means that total cash payments to vendors during the year exceeded the current period’s accrual basis expenses. Under the cash basis, expenses are recorded when payment is made, so the $15 must be deducted to arrive at cash basis income

This is a wordy accounting explanation that I feel like is simple but I can’t grasp the concept.

Please help!

[harris016]

**The explanation for decreasing the AP

[harris016]

**The explanation for decreasing the AP

[mtwst113]

Can you provide the exact explanation they give for the question? I think I can help

BEC | √
AUD| √
FAR| Spring 2015

[mtwst113]

Can you provide the exact explanation they give for the question? I think I can help

BEC | √
AUD| √
FAR| Spring 2015

[harris016]

It states decrease in accounts payable means that total cash payments to vendors during the year exceeded the current period's accrual basis expenses. Under the cash basis, expenses are recorded when payment is made, so the $15 must be deducted to arrive at cash basis income

Can you put that another way its not clicking

[harris016]

It states decrease in accounts payable means that total cash payments to vendors during the year exceeded the current period's accrual basis expenses. Under the cash basis, expenses are recorded when payment is made, so the $15 must be deducted to arrive at cash basis income

Can you put that another way its not clicking

[Anonymous]

This is the “tool” I try to go by, and someone please correct me if I'm wrong:

Cash Net Income

+ Increase in Assets

– Decrease in Assets

– Increase in Liabilities

+ Decrease in Liabilities

---

= Accrual Net Income

To solve for Cash Net Income, simply work up with opposite signs.

As for Accounts Payables, if you have an increase in payables, using the Accrual method, you recorded an expense or cost of goods (decrease of income) but it was on account, so no cash outlay occurred. If you have a decrease in payables, more payables were paid (cash outlay) than expenses or cost of goods were incurred during the year, so it's a larger decrease for cash income than for accrual income.

You have to remember, when an accounts payable is recorded, that payable may stay on the books going into another period although the expense or cost of goods was incurred in a prior period. So that is where the difference between the accrual and cash income arises.

I hope that helps a bit, I'm terrible at explaining things =/

[Anonymous]

This is the “tool” I try to go by, and someone please correct me if I'm wrong:

Cash Net Income

+ Increase in Assets

– Decrease in Assets

– Increase in Liabilities

+ Decrease in Liabilities

---

= Accrual Net Income

To solve for Cash Net Income, simply work up with opposite signs.

As for Accounts Payables, if you have an increase in payables, using the Accrual method, you recorded an expense or cost of goods (decrease of income) but it was on account, so no cash outlay occurred. If you have a decrease in payables, more payables were paid (cash outlay) than expenses or cost of goods were incurred during the year, so it's a larger decrease for cash income than for accrual income.

You have to remember, when an accounts payable is recorded, that payable may stay on the books going into another period although the expense or cost of goods was incurred in a prior period. So that is where the difference between the accrual and cash income arises.

I hope that helps a bit, I'm terrible at explaining things =/

[mtwst113]

I think its better not to look at their explanation for this one. Just think logically. AR increased by 20, so that requires a deduction (I think you understand why). Since AP decreased by $15, you can simply assume that there was a $15 outflow that had to have come from cash.

BEC | √
AUD| √
FAR| Spring 2015

[mtwst113]

I think its better not to look at their explanation for this one. Just think logically. AR increased by 20, so that requires a deduction (I think you understand why). Since AP decreased by $15, you can simply assume that there was a $15 outflow that had to have come from cash.

BEC | √
AUD| √
FAR| Spring 2015

[harris016]

I was really over thinking it. 4corners thanks for the formula I like visuals that helps alot.

mtwst113 it is really that simple thanks for the advice…..studying at 2:36 am can lead to brain cramps!

[harris016]

I was really over thinking it. 4corners thanks for the formula I like visuals that helps alot.

mtwst113 it is really that simple thanks for the advice…..studying at 2:36 am can lead to brain cramps!

[Author]

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