ABC Company uses cash basis accounting for its records. During 2010, ABC collected $400,000 from its customers, made payments of $300,000 to its suppliers for inventory, and paid $140,000 for operating costs. ABC wants to prepare accrual basis financial statements. In gathering information for the accrual basis financial statements, ABC discovered the following:
Customers owed ABC $45,000 at the beginning of 2010 and $55,000 at the end of 2010. ABC owed suppliers $20,000 at the beginning of 2010 and $28000 at the end of the 2010. ABC’s beginning inventory was $40000 and its ending inventory was $44000.
What should ABC’s Gross Profit be on the accrual basis?
$___________
To calculate ABC's Gross Profit on the accrual basis, we need to consider the revenue and expenses in accordance with the accrual accounting method.
1. Determine the total revenue:
- ABC collected $400,000 from customers during 2010.
- Customers owed ABC $45,000 at the beginning of 2010 and $55,000 at the end of 2010.
Total revenue = Cash collected + Accounts receivable at the end - Accounts receivable at the beginning
Total revenue = $400,000 + $55,000 - $45,000
Total revenue = $410,000
2. Determine the cost of goods sold (COGS):
- ABC made payments of $300,000 to suppliers for inventory.
- ABC owed suppliers $20,000 at the beginning of 2010 and $28,000 at the end of 2010.
- ABC's beginning inventory was $40,000, and its ending inventory was $44,000.
COGS = Payments to suppliers for inventory + Inventory at the beginning - Inventory at the end + Accounts payable at the end - Accounts payable at the beginning
COGS = $300,000 + $40,000 - $44,000 + $28,000 - $20,000
COGS = $304,000
3. Calculate the Gross Profit:
Gross Profit = Total revenue - COGS
Gross Profit = $410,000 - $304,000
Gross Profit = $106,000
Therefore, ABC's Gross Profit on the accrual basis would be $106,000.
To determine ABC's Gross Profit on the accrual basis, we need to consider the revenue and the associated costs of goods sold.
First, let's calculate the revenue or sales for ABC on accrual basis.
- ABC collected $400,000 from its customers during 2010.
- However, at the beginning of the year, customers owed ABC $45,000, and at the end of the year, customers owed $55,000.
- So, the actual revenue earned by ABC during the year would be $400,000 + $55,000 - $45,000 = $410,000.
Now, let's calculate the cost of goods sold on the accrual basis.
- ABC made payments of $300,000 to its suppliers for inventory during 2010.
- At the beginning of the year, ABC owed suppliers $20,000, and at the end of the year, the outstanding payable was $28,000.
- So, the actual cost of goods sold would be $300,000 + $28,000 - $20,000 = $308,000.
Finally, we can calculate the Gross Profit on the accrual basis.
Gross Profit = Revenue - Cost of Goods Sold
Gross Profit = $410,000 - $308,000 = $102,000.
Therefore, ABC's Gross Profit on the accrual basis should be $102,000.