[jlondon]

The question summarized:

Cash Basis pretax income = $150,000

Current year-end A/R decreased by $20,00 and A/P increased by $16,000 from previous year-end balances.

Compared to accrual basis method, Cash basis pretax income is:

Answer/Explanation:

The requirement is to determine the diff. between accrual-basis income and cash basis income. Because A/R decreased by $20,000 the cash received was $20,000 more than the accrual basis sale. Since A/P increased by $16,000 during the year, accrual basis expenses were $16,000 more than cash payments. Therefore, accrual-basis net income is equal to $114,000. And, Cash-basis pretax income is $36,000 higher than the accrual basis income.

My problem: I don’t know what’s wrong with me.. I’m just not getting this explanation. I ran across a few questions like this, and each time I don’t know when to add/subtract the A/R, or add/subtract the A/P, etc.. to change from cash to accrual or vice-versa. Maybe the explanation is given is simple, but I can’t digest it in my head? I keep getting confused what to do. Does anybody have a more simple technique to memorize how to change cash to accrual/ accrual to cash?? Thanks,

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[barelystayingsane]

This is how I like to think about it… A/R decreased over the year, which means that they collected cash on outstanding receivables, thus increasing cash (DR: Cash; CR: A/R). Under cash basis, income is earned when cash is received. Under accrual basis, income was earned when that receivable was recorded. Thus, in this year, cash basis income will be higher. When A/P increases over the year, it means that their borrowings increased, thus increasing cash (DR: Cash; CR: A/P), so add that, as well.

You'll need to know this for the statement of cash flows, but generally, an increase (decrease) in assets means a decrease (increase) in cash, and an increase (decrease) in liabilities means an increase (decrease) in cash.

[barelystayingsane]

This is how I like to think about it… A/R decreased over the year, which means that they collected cash on outstanding receivables, thus increasing cash (DR: Cash; CR: A/R). Under cash basis, income is earned when cash is received. Under accrual basis, income was earned when that receivable was recorded. Thus, in this year, cash basis income will be higher. When A/P increases over the year, it means that their borrowings increased, thus increasing cash (DR: Cash; CR: A/P), so add that, as well.

You'll need to know this for the statement of cash flows, but generally, an increase (decrease) in assets means a decrease (increase) in cash, and an increase (decrease) in liabilities means an increase (decrease) in cash.

[Kls238]

To quote @spartyon on a quote from him from

2 years ago, “A change in assets takes the same sign (an increase in assets is added and a decrease is subtracted) and a change in liabilities takes the opposite sign (an increase is subtracted and a decrease is added). You will do the opposite when doing the indirect method for a SCF because you are going accrual to cash.”

I had trouble with cash and accrual problems just like the one you posted. This little trick has helped me everytime so far.

Passed all sections.

[Kls238]

To quote @spartyon on a quote from him from

2 years ago, “A change in assets takes the same sign (an increase in assets is added and a decrease is subtracted) and a change in liabilities takes the opposite sign (an increase is subtracted and a decrease is added). You will do the opposite when doing the indirect method for a SCF because you are going accrual to cash.”

I had trouble with cash and accrual problems just like the one you posted. This little trick has helped me everytime so far.

Passed all sections.

[jlondon]

Thanks Both! It does Help a Lot.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[jlondon]

Thanks Both! It does Help a Lot.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[huytuan124]

@Kls238: this little trick is handy but I think we should be careful because it will depend on what they ask for. For example, if they ask us to reconcile cash-basis expense to accrual-basis expense with a change in prepaid expense, this trick won't work. The increase in prepaid expense is actually subtracted to get to the accrual.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[huytuan124]

@Kls238: this little trick is handy but I think we should be careful because it will depend on what they ask for. For example, if they ask us to reconcile cash-basis expense to accrual-basis expense with a change in prepaid expense, this trick won't work. The increase in prepaid expense is actually subtracted to get to the accrual.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[Anonymous]

This is a raw of getting to the answer, however, please use others explanation to understand why we are adding or deducting. For this sort of questions, I get wined up as well. But here's a trick that works for me:

CA up +

CA down –

CL up –

CL dwn +

So for the problem you put: 150000-20000-16000=114000.

I hope this helps.

[Anonymous]

This is a raw of getting to the answer, however, please use others explanation to understand why we are adding or deducting. For this sort of questions, I get wined up as well. But here's a trick that works for me:

CA up +

CA down –

CL up –

CL dwn +

So for the problem you put: 150000-20000-16000=114000.

I hope this helps.

[jlondon]

@CPA_man.. Thanks, I'll have to take a look at it this weekend.. Kinda put this problem aside.. as simple as it is.. it just wouldn't stick in my head…. and thanks all for the suggestions.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[jlondon]

@CPA_man.. Thanks, I'll have to take a look at it this weekend.. Kinda put this problem aside.. as simple as it is.. it just wouldn't stick in my head…. and thanks all for the suggestions.

BEC: 69, 57, 72, 73, (anticipated for 4/4/2015)
AUD: 65, 63, 74, 84!!! (expires 7/31/2015)
FAR: 63, 57, (scheduled for 4/1/2015)
REG: ... 42, (Anticipated to be around 5/20~)

-Every Set Back is a Set Up for a Major Come Back #motivation

"I've missed over 9,000 shots in my career. I've lost over 300 games. 26 times I've been trusted to take the game winning shot, and missed. I've failed, over and over and over again in my life. And that is why, I succeed." - Michael Jordan

"You are not your past, but the resources and capabilities you glean from it" -Jordan Belfort

[Study Monk]

tired post edit

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

tired post edit

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[musicamor]

With cash basis accounting, if a revenue-type account increases, revenue increases; the inverse for an expense-type account. Think Debits vs. Credits. In this problem, the fact pattern told us that Receivable decreased, which is a credit to A/R; therefore, the offset is a debit to earnings, which reduces cash-basis net income. Make sense? Cash Flows are easy – let me know if you need any help on that statement, because it is heavily tested on FAR and even AUD.

Texas CPA - licensed in 2012!!!

[Author]

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