Question

Buenos Noches Roaches is a residential pest control company that offers a 12-month home-service contract to eliminate insect infestation. Customers choose one of two options:

(1) pay at the time of service or

(2) automatic payment after every six months of service.

In terms of cash flow to Buenos, how would the accrual basis and cash basis differ for each billing option?

A.) The accrual basis and cash basis would be equal for the six-month billing cycle. The accrual basis would overstate cash flow for the payment at time of service option.

B.) The accrual basis would overstate cash flow for the payment at time of service option and the six-month billing cycle.

C.)  The cash basis would overstate cash flow for the payment at time of service option and the six-month billing cycle.

D.) The accrual basis and cash basis would be the same for the pay at time of service option. The accrual basis would overstate cash flow for the six-month billing cycle.

Answer 1

Answer )(d) The accrual basis and cash basis would be the same for the pay at time of service option. The accrual basis would overstate cash flow for the six-month billing cycle

Explanation

In accrual basis revenue and expenses are recorded on the date of occurrence whether actual payment that is cash received or not

In cash basis revenue and expenses are recorded only when actual cash has been received

On pay at service option both will record transaction therfore same

On six month Billing cycle accrual basis will overstate the cash flow as on cash basis it will be recorded only when actual cash will be received