E3-3 Conan Industries collected $100,000 from customers in 2008. Of the amount collected,
$25,000 was from revenue earned on account in 2007. In addition, Conan earned $40,000 of revenue in 2008, which will not be collected until 2009.
Conan Industries also paid $70,000 for expenses in 2008. Of the amount paid, $30,000 was for
expenses incurred on account in 2007. In addition, Conan incurred $42,000 of expenses in 2008,
which will not be paid until 2009.
Instructions
(a) Compute 2008 cash-basis net income.
(b) Compute 2008 accrual-basis net income.
To compute the 2008 cash-basis net income and accrual-basis net income, we need to understand the difference between cash basis and accrual basis accounting.
Cash basis accounting recognizes revenue and expenses when cash is actually received or paid. It doesn't consider when revenue is earned or when expenses are incurred. On the other hand, accrual basis accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.
Now, let's compute the 2008 cash-basis net income and accrual-basis net income based on the given information.
(a) Computing 2008 cash-basis net income:
To calculate cash-basis net income, we need to consider only the cash received and cash paid during the year.
Cash received from customers in 2008 = $100,000
Cash received from revenue earned on account in 2007 = $25,000
Total cash received in 2008 = $100,000 + $25,000 = $125,000
Expenses paid in 2008 = $70,000
Expenses paid for expenses incurred on account in 2007 = $30,000
Total expenses paid in 2008 = $70,000 + $30,000 = $100,000
Cash-basis net income = Total cash received - Total expenses paid
Cash-basis net income = $125,000 - $100,000 = $25,000
So, the 2008 cash-basis net income for Conan Industries is $25,000.
(b) Computing 2008 accrual-basis net income:
To calculate accrual-basis net income, we need to consider both cash received/payable during the year and revenue earned/expenses incurred, regardless of when cash is received/paid.
Revenue earned in 2008 = $40,000
Revenue earned on account in 2007 = $25,000
Total revenue earned in 2008 = $40,000 + $25,000 = $65,000
Expenses incurred in 2008 = $42,000
Expenses incurred on account in 2007 = $30,000
Total expenses incurred in 2008 = $42,000 + $30,000 = $72,000
Accrual-basis net income = Total revenue earned - Total expenses incurred
Accrual-basis net income = $65,000 - $72,000 = -$7,000
Note that the negative sign indicates a net loss.
So, the 2008 accrual-basis net income for Conan Industries is -$7,000.