Question

Cathy opens a retail store. Her sales during the first year are $ 850,000?, of which $ 80,000 has not been collected at? year-end. Her purchases are $ 500000. She still owes $ 15000 to her? suppliers, and at? year-end she has $ 65,000 of inventory on hand. She incurred operating expenses of $125,000. At? year-end she has not paid $ 40,000 of the expenses.

a.	Compute her net income from the business assuming she elects the accrual method. Sales Cogs Gross Profit Operating Expenses Net Income
b.	Compute her net income from the business assuming she elects the cash method. Sales Cogs Gross Profit Operating Expenses Net Income
c.	Would paying the $ 40,000 she owes for operating expenses before? year-end change her net income under accrual method of? reporting? under the cash?method?

Answer 1

a ) compute of net income under accrual basis

sales = 850000

less purchases = 500000

less ending inventory = 65000 = 435000

operating expences = 125000

net operating income = 130000

b ) computation of net income under cash basis

   sales = 770000

less purchases = 485000

less ending inventory = 50000 = 435000

operating expences = 85000

net operating income = 250000

c) the payment of 40000 operative expenses the net income under accrual method does not change

but the net income under cash basis

= 250000 - 40000

= 210000