Question

1. TaiShar Industries, a private company, is considering a change to the cash basis of accounting from the accrual basis of accounting. This year, TaiShar reported $35,000 of total accrual basis expenses on the income statement. At the beginning of the year, TaiShar had of $15,000 of accrued expenses and $2,000 of prepaid expenses. At the end of the year, TaiShar had $24,000 of accrued expenses and $6,000 of prepaid expenses. TaiShar also reported $7,000 of depreciation expense for the year, but paid no cash for PP&E during the year.

   What would be the difference in net income if TaiShar reported the current year expenses on the cash basis, instead of the accrual basis?

   		Net income would decrease by 6,000 if expenses were recorded on the cash basis.
   		Net income would increase by 12,000 if expenses were recorded on the cash basis.
   		Net income would increase by 20,000 if expenses were recorded on the cash basis.
   		None of the other answer choices is correct.
   		Net income would decrease by 2,000 if expenses were recorded on the cash basis.
   		Net income would decrease by 20,000 if expenses were recorded on the cash basis.
   		Net income would increase by 2,000 if expenses were recorded on the cash basis.
   		Net income would decrease by 12,000 if expenses were recorded on the cash basis.
   		Net income would increase by 6,000 if expenses were recorded on the cash basis.

Answer 1

Accrual basis expense = $35,000

Accrual expenses, beginning = $15,000

Prepaid expenses, beginning = $2,000

Accrual expenses, ending= $24,000

Prepaid expenses, ending = $6,000

Depreciation expense = $7,000

Cash basis expenses = Accrual basis expense+ Accrual expenses, beginning- Prepaid expenses, beginning-Accrual expenses, ending+Prepaid expenses, ending -Depreciation expense

= 35,000+15,000-2,000-24,000+6,000-7,000

= $23,000

Since cash basis expenses are $12,000 less than accrual basis, hence Net income would increase by 12,000 if expenses were recorded on the cash basis.

Second option is correct.