[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~)

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[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!!!

[Anonymous]

I also hv trouble with understanding the cash to accrual as well. I will try to tips posted here. Hopefully I will eventually get the logic behind this as well.

[Anonymous]

I also hv trouble with understanding the cash to accrual as well. I will try to tips posted here. Hopefully I will eventually get the logic behind this as well.

[Author]

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