Question

Busby Corp. uses cash‐basis accounting for its records. During 2019, Busby collected $780,000 from its customers, made payments of $420,000 to its suppliers for inventory, and paid $170,000 for administrative costs. Busby wants to prepare accrual‐basis financial statements. In gathering information for the accrual‐basis financial statements, Busby discovered the following:  

1. Customers owed Busby $40,000 at the beginning of 2019 and $36,000 at the end of 2019.  

2. Busby owed suppliers $19,000 at the beginning of 2019 and $28,000 at the end of the 2019.  

3. Busby’s beginning inventory was $63,000 and its ending inventory was $47,000.  

What should Busby’s Gross Profit be on accrual basis?

Answer 1

Cash receipts from customers = $780,000

Accounts receivables, Beginning = $40,000

Accounts receivables, Ending = $36,000

Cash payment to suppliers = $420,000

Accounts payable, Beginning = $19,000

Accounts payable, Ending = $28,000

Beginning inventory = $63,000

Ending inventory was $47,000

Cash receipts from customers = Revenue from sales + Decrease in accounts receivables

780,000 = Revenue from sales + (40,000 - 36,000)

Revenue from sales = $776,000

Cash payment to suppliers = Cost of goods sold - Decrease in inventory - Increase in accounts payable

420,000 = Cost of goods sold - (63,000 - 47,000) - (28,000 - 19,000)

420,000 = Cost of goods sold - 16,000 - 9,000

Cost of goods sold = $445,000

Gross profit = Revenue from sales - Cost of goods sold

= 776,000 - 445,000

= $331,000