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Reporting Cash versus Accrual Basis Income: Mostert Music Co

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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.

Complete the following statements:

Please see attached Excel

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Solution Summary

The solution includes an Excel worksheet showing the calculations for an income statement in two formats: cash and accrual. More important are the explanations about the differences in the two methods including a little accounting and tax theory about inventory treatment.

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There is a misconception about the cash basis of accounting which often goes uncorrected in the real world when financial information is prepared by individuals who don't understand about the inventory issue in cash basis. In accounting theory, the matching principle is applied by understanding that you match the amount of inventory sold to the amount reported as sales.

If cash basis and not ...

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