Question

Question 5

Aunt Athena’s Catering Service provides catering service for special occasions. During 2019, Aunt Athena performed $140,500 of catering services and collected $110,300 of cash from customers. Salaries earned by Aunt Athena’s employees during 2019 were $40,000. Aunt Athena paid employees $36,500 during 2019. Aunt Athena had $1,300 of supplies on hand at the beginning of the year and purchased and paid for an additional $7,000 of supplies during the year. Supplies on hand at the end of 2019 were $1,700. Other selling and administrative expenses incurred and paid for during 2019 were $5,500.   

Required:

1. Calculate Aunt Athena’s amount of accrual and cash-basis income for 2019 by completing the table below.

	ACCRUAL BASIS	CASH BASIS
Revenues:
Catering services
Less Expenses:
Salaries
Supplies
Other administrative and selling
Net Income

2. Which basis (cash or accrual) reflects more accurately the performance of Aunt Athena’s business? Briefly explain why.

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Answer 1

	Accrual Basis	Cash Basis
Revenues:
Catering services	$140,500	$110,300
Less Expenses:
Salaries	$40,000	$36,500
Supplies ($1300+$7000-$1700)	$6,600	$7,000
Other administrative and selling	$5,500	$5,500
Total Expenses	$52,100	$49,000
Net Income	$88,400	$61,300

Accrual basis reflects the more accurate performance of Aunt Athena’s business because under accrual basis of accounting income is recognized when it is earned and expenses are recognized when they are incurred irrespective of the fact that income is received or not and expenses are paid or not.