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I’ve come across two past exam MCQs whose answers seem to contradict each other. Can someone please help me with this…
Q1)
Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
A. $125,000
B. $135,000
C. $165,000
D. $175,000
According to the text, the answer is C because:
Cash-based operating expenses $150,000
Add the beginning of the year prepaid expenses, 10,000.
Subtract the end of the year prepaid expenses, (15,000).
Subtract the beginning of the year accrued expenses, ( 5,000).
Add the end of the year accrued expenses, 25,000.
Accrual-based operating expenses, $165,000
In this question, for the prepaid asset, you ADD the beginning balance, and SUBTRACT the ending balance. Also for accrued expenses (AKA, a liability, something like wages payable), you SUBTRACT the beginning balance, and ADD the ending balance.
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Q2)
A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative Balance Sheet information:
Beginning of year End of year
Accounts payable $ 3,000 $ 1,000
Unearned revenue 300 500
Wages payable 300 400
Prepaid rent 1,200 1,500
Accounts receivable 1,400 600
What amount should the company report as its accrual-based net income for the current year?
A. $68,800
B. $70,200
C. $71,200
D. $73,200
According to the text, the correct answer is C because:
The general rule to convert from cash to accrual is to add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
This is the exact opposite information as the first questions. Can someone please explain to me what I am missing.
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