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Matt Morgan: Compute net income using cash and accrual basis

On December 31, 2009, Matt Morgan completed the first year of operations for his new computer
retail store. The following data were obtained from the company's accounting records:

Sales to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,000
Collections from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,000
Interest earned and received on savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,500
Amounts paid to suppliers for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,000
Wages owed to employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Wages paid to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Utility bill owed: to be paid next month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
Interest due at 12/31 on loan to be paid in March of next year . . . . . . . . . . . . . . . . . . . . . . 1,200
Amount paid for one and one-half years' rent, beginning Jan. 1, 2009 . . . . . . . . . . . . . . . . . 17,500
Income taxes owed at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

1. How much net income (loss) should Matt report for the year ended December 31, 2009,
according to (a) cash-basis accounting and (b) accrual-basis accounting?

2. Which basis of accounting provides the better measure of operating results for Matt?

Solution Summary

The expert computes the net income using cash and accrual basis.

$2.19