Guys, hold tight and before we go potty tomorrow morning, let's commit this memory:
Formula: Cash Basis Vs. Accrual Basis
Revenue, Cash Basis
+ Receivable
+ Prepaid
– Payable
– Unearned Fee
Revenue, Accrual Basis
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So if the problem says, “increase” in AR, just add it (just like + & + = +).
And if it says “decrease” in AR, deduct it (remember, + & – = – )
And since payable is a deduction item, “increase” should be – . ( – & – = -)
From the sample question above:
Revenue/Receipts, Cash Basis >> 150,000 (+)
Decrease in AR >>>>>>>>>>>>>> 20,000 (-)
Increase in AP >>>>>>>>>>>>>>> 16,000 (-)
Revenue, Accrual Basis >>>>>>>> 114,000
The answer is C.
Cash basis of 150,000 is $36,000 higher than the accrual basis revenue of $114,000.
150,000 – 114,000 = 36,000
I actually got this question wrong on my first attempt (Letter A: Lower of 36,000) because I got excited too fast seeing the figure I was looking for:( RTMFQ, Mi Amor!!!)
An item that is (+) or Addition, means (+) Ending (-) Beginning
An item that is (-) or Deduction means (-) Ending (+) Beginning
For example, if the problem gives us beg. and end. of AR, with our eyes closed, let's just add and deduct the figure based on the formula. Same process applies to AP. Since it a deduction item, deduct ending balance and add beginning balance.
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