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Define and contrast accrual vs cash basis accounting

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1. Define accrual accounting and contrast it with cash basis accounting.

2. What four conditions must normally be met for revenue to be recognized under accrual basis accounting?

3. See attached

4. See attached spreadsheet detailing problem # 1-30A & a template created for the different financial statements.

M3-2 Reporting Cash Basis versus Accrual Basis Income

Mostert Music Company had the following transactions in March:
a. Sold instruments to customers for $10,000; received $6,000 in cash and the rest on account. The cost of the instruments was $7,000.
b. Purchased $4,000 of new instruments inventory; paid $1,000 in cash and owed the rest on account.
c. Paid $600 in wages for the month.
d. Received a $200 bill for utilities that will be paid in April.
e. Received $1,000 from customers as deposits on orders of new instruments to be sold to the customers in April.

O'Shea Enterprises started the 2002 accounting period with $30,000 of assets (all cash), $18,000 of liabilities, and $4,000 of common stock. During the year, O'Shea earned cash revenues of $48,000, paid cash expenses of $32,000, and paid a cash dividend to stockholders of $2,000. O'Shea also acquired $10,000 of additional cash from the sale of common stock and paid $6,000 cash to reduce the liability owed to a bank.

Prepare an income statement, statement of changes in stockholders' equity, period-end balance sheet, and statement of cash flows for the 2002 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)

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Solution Preview

See attachments.

1. In accrual accounting, revenues are recognized when the income is earned and expenses are recorded when incurred. In cash basis accounting, the revenue and expenses are recorded when cash is received and paid. The difference is that in cash basis, recording will be done only when cash changes hand. So if we sell and collect in cash then we will record the sale or we will record ...

Solution Summary

The solution explains accrual and cash basis accounting and applies it to Mostert Music Company. The solution also explains the preparation of financial statements for O'shea Enterprises