November 18, 2019 at 8:05 am #2800032FutureCPA123Participant
Is there an error in this question, or am I just overthinking it? I usually do not have any issues with accrual/cash basis questions… I thought you added increases in assets and decreases in liabilities when converting cash to accrual. This question says you subtract them?? I get that you'd subtract them if it said accrual to cash.
Dannon Co. reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:
Beginning prepaid expense $1,300
Beginning accrued expense 1,650
Ending prepaid expense 1,800
Ending accrued expense 1,200
What amount of expense should Dannon report on its books under the accrual basis?
It says the answer is A.
The best way to approach this question is by thinking through the effect on cash basis expenses for the change in the prepaid and accrued expenses. The expenses reported on a cash basis are 35,200. Prepaid expenses increased by 500; which means that more cash was paid than expense incurred. Therefore, the 500 should be deducted from the cash basis expense to derive accrual basis expense. Accrued expenses decreased by 450; which means more cash was paid than expenses incurred. Therefore, the 450 should be deducted from the cash basis expense to derive the accrual basis expense. The correct answer is 35,200 – 500 – 450 = 34,250.
I'm calculating it as 35,200 + 500 + 450 = $36,150.November 18, 2019 at 10:08 am #2800161CH89Participant
There is no error in this question. I understand your thinking, but the best way to handle these type of questions is through the use of journal entries. Plug in your known values and solve for the missing value.
DR: Expense: 34,250 – this is our “plug” value
DR: Prepaid Expense: 500
DR: Accrued Expense: 450
CR: Cash: 35,200November 18, 2019 at 10:10 am #2800170KevinParticipant
Answer A looks correct to me. If the $35,200 was net income you would add the $500 and $450. But since it's expense it goes the other direction. Make sure to take you time on these types of questions!November 18, 2019 at 2:20 pm #2800443FutureCPA123Participant
Thank you both! That’s what got me. I’m use to converting cash to accrual when dealing with net income, not just expenses.November 18, 2019 at 7:07 pm #2800905fParticipant
Cash to Accrual-
Net income & Revenue-
Add increases in assets and subtract decreases in assets (For Accrual to Cash do the opposite of this)
Subtract increases in Liabilities and add decreases in liabilities (For Accrual to Cash do the opposite of this)
Expenses- basically do the opposite of above:
Subtract increases in assets and and add decreases in assets (For Accrual to Cash do the opposite of this)
Add increases in liabilities and subtract decreases in liabilities (For Accrual to Cash do the opposite of this)September 9, 2021 at 8:07 pm #3305927AllyParticipant
THANK YOU SO MUCH I literally started studying yesterday, today I was nearly in tears because I wasn't understanding this question. Literally made an account just to say thanks for the help!
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