[Anonymous]

Hi there,

I have been starring at FAR for 2 days straight and can’t seem to think straight any more. Could anyone please explain to me why the J/E approach fails to yield the desired results (or what am I doing wrong) for the question below…

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Co’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?

Answer is $165,000.

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I’m trying to plug it into J/E but failing miserably as I see 135 as result:

Dr Op Expense 150

Dr Prepaid Exp 5

Cr Accrued Liab 20

Cr Income 135

[Anonymous]

You need to not approach these questions with journal entries.

Instead, remember that when converting from cash to accrual, you move in the opposite direction of the asset accounts ($10,000 to $15,000) and you move in the same direction of the liability accounts ($5,000 – $25,000).

Netting, you get a decrease of $5,000 and an increase of $20,000 resulting in $15,000 or $165,000.

[Anonymous]

You need to not approach these questions with journal entries.

Instead, remember that when converting from cash to accrual, you move in the opposite direction of the asset accounts ($10,000 to $15,000) and you move in the same direction of the liability accounts ($5,000 – $25,000).

Netting, you get a decrease of $5,000 and an increase of $20,000 resulting in $15,000 or $165,000.

[Anonymous]

.

[Anonymous]

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[ocboa]

appreciate the explanation

[ocboa]

appreciate the explanation

[saucesah]

Wiley has a good reference table that helped… i'll try demonstrate it below.

It takes Net Income to Cash Basis

Asset | Liability

Increase – | +

Decrease + | –

If you have an asset that increased, then you remove (-) it from NI, if it decreased then you would add it back.

If you have an liability that increased, you would add it back… and vice versa.

To go from Cash to Accrual, you would just swap the signs in the table to the opposite.

I basically just remembered this table… however, when I would do MCQs I would still ensure that the logic made sense, this just helped me piece it together.

Today, I became a cool kid.

AUD - Passed
REG - Passed
BEC - Passed
FAR - Passed

[saucesah]

Wiley has a good reference table that helped… i'll try demonstrate it below.

It takes Net Income to Cash Basis

Asset | Liability

Increase – | +

Decrease + | –

If you have an asset that increased, then you remove (-) it from NI, if it decreased then you would add it back.

If you have an liability that increased, you would add it back… and vice versa.

To go from Cash to Accrual, you would just swap the signs in the table to the opposite.

I basically just remembered this table… however, when I would do MCQs I would still ensure that the logic made sense, this just helped me piece it together.

Today, I became a cool kid.

AUD - Passed
REG - Passed
BEC - Passed
FAR - Passed

[ocboa]

and an easy way to understand the logic is if an asset like a/rec decreases, you could assume you collected cash. So when asset decreases you add to net income.

If a liability like accts payable decreases, you could assume you paid cash. So when a liability decreases, you subtract from net income.

[ocboa]

and an easy way to understand the logic is if an asset like a/rec decreases, you could assume you collected cash. So when asset decreases you add to net income.

If a liability like accts payable decreases, you could assume you paid cash. So when a liability decreases, you subtract from net income.

[Anonymous]

Thanks guys, much appreciated.

[Anonymous]

Thanks guys, much appreciated.

[Anonymous]

I don't think there is anything wrong with breaking this down in journal entry format. You are just doing that incorrectly.

The correct entry would be as follows:

DR. Operating Expense (Plug) – This would be 165

DR. Prepaid Expense 5

CR. Accrued Liab. 20

CR. Cash Paid for Op Exp 150

You just need to make sure to double check whether you are converting from accrual to cash or vice versa. This particular problem states “Cash paid for operating expense” rather than operating expense in the traditional accrual format. Your solution assumes your plug is “income”, but that would only be the case if you were converting from accrual to cash.

Hope this helps provide some clarification. Best of luck!

[Anonymous]

I don't think there is anything wrong with breaking this down in journal entry format. You are just doing that incorrectly.

The correct entry would be as follows:

DR. Operating Expense (Plug) – This would be 165

DR. Prepaid Expense 5

CR. Accrued Liab. 20

CR. Cash Paid for Op Exp 150

You just need to make sure to double check whether you are converting from accrual to cash or vice versa. This particular problem states “Cash paid for operating expense” rather than operating expense in the traditional accrual format. Your solution assumes your plug is “income”, but that would only be the case if you were converting from accrual to cash.

Hope this helps provide some clarification. Best of luck!

[shinallsm]

Honestly, I've set mine up as kind of a mnemonic, but it a strange way. I don't know if you have played old school mortal combat when you have to do up downs up down and a b x , etc etc you get the point anyways. Here it is, it's worked for everything I've done so far.

Liability ▲ —

Liability ▼ +

Asset ▲ +

Asset ▼ —

So for instance if they are on cash and going to accrual, if the liability ▲ (increases) then I subtract that for the accrual method. If the Asset ▲ (increases) then I add that for the accrual method.

Essentially, I just remember Liability x2, Assets x2 then up down for both, then i create the out side box with — and the inside options are +.

Not sure if that helps, but its the way my brain works.

REG - 90 - 10/31/14
FAR - 77 - 1/3/15
AUD - 89 - 4/1/15
BEC - ?? - 5/27/15

[Author]

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