[Hangry]

For the life of me, I can’t understand why cash is added back when AP is paid down.

Class Corp. maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Class had $60,000 in cash-basis pretax income for Year 2. The following information pertains to Class’s operations for the years ended December 31, Year 2 and Year 1:

Year 2 Year 1

Accounts receivable $ 40,000 $ 20,000

Accounts payable 15,000 30,000

Under the accrual method, what amount of income before taxes should Class report in its December 31, Year 2, income statement?

FAR: 49, 64

[Credit Revenue]

The cash basis represents the actual cash outflow. From an accrual perspective you have to add it back to cash basis if it decreases…because it was just a cash outflow. The expense was incurred when it was accrued for accrual basis.

It's added back when you are going from cash basis to accrual basis. They can twist these questions 100 ways so understanding accrual basis accounting is the 1st thing to grasp. Cash basis is straightforward.

A - 79 expires 4/30/16 need a pass on REG
B - 78
F - 80
R - 83!!! Can live again!

[Spartans92]

Accrual is all about matching principle so you dont care about when you pay your cash out. Usually your AP and AR will go the same way. You have to recognize the Revenue and Expenses in the period incurred.

BEC- PASS

[srv101284]

To simplify…

Accounts receivable increased by $20k, meaning you didn't book income of $20k under the cash basis since cash wasn't received. Under the accrual basis, you would have booked that $20k in income and increased your net income of $60k to $80k. The cash collection in the following period would have no effect on net income.

Accounts payable decreased by $15k, meaning you paid cash out. Cash basis means you booked an expense when cash moved, but in reality, you would have booked that expense when incurred under the accrual basis (in the prior period). With this in mind, you reduce your current expenses by the $15k you booked under cash method, thus increasing net income by $15k. The increase of $20k for AR and increase of $15k for AP take you to $95k Net Income.

[Author]

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