For both cases, show what each firm would report in its annual statement of profit and loss and other comprehensive income under the:
a)Cash Basis
b)Accrual Basis
CASE 1
During 2012 Gangnam Marketing earned revenues of $500,000 on account. Gangnam collected $510,000 from the customers during the year. Expenses totaled $420,000 and the related cash payments were $400,000.
CASE 2
Bella Foods made sales of $700,000 during 2012. Out of this amount Bella collected cash for all but $30,000. Operating expenses for the year amounted to $650,000. However, during the year, Bella paid $650,000 for the expenses, which include $30,000 advance rental.
*actually i don't know what the question need, does it need in journal/account/income statement? can someone show me how to do it and the final answer should be what?
To determine what each firm would report in its annual statement of profit and loss and other comprehensive income under the cash basis and accrual basis, we will need to follow these steps:
1. Cash Basis:
Under the cash basis, revenue and expenses are recognized only when cash is received or paid. The key is to focus on actual cash transactions.
a) For Case 1:
Revenue: Gangnam Marketing earned revenues of $500,000 on account. However, they collected $510,000 in cash during the year. Therefore, they would report $510,000 as revenue.
Expenses: Expenses totaled $420,000, and the related cash payments were $400,000. Since the firm paid $400,000 in cash, they would report this amount as their expenses.
b) For Case 2:
Sales: Bella Foods made sales of $700,000 during 2012, and out of this amount, they collected cash for all but $30,000. Therefore, they would report $670,000 as their sales.
Expenses: Operating expenses amounted to $650,000, and Bella Foods paid $650,000 for these expenses, including $30,000 in advance rental. Since the payment was made in cash, they would report $650,000 as their expenses.
2. Accrual Basis:
Under the accrual basis, revenue and expenses are recognized when they are earned or incurred, regardless of the actual cash flow. The key is to focus on when the transactions occur, not on the cash exchange.
a) For Case 1:
Revenue: Gangnam Marketing earned revenues of $500,000 on account. Since the revenue was earned, they would report the full $500,000 as their revenue, regardless of when the cash is received.
Expenses: Expenses totaled $420,000, and the related cash payments were $400,000. Since the expenses were incurred, they would report the full $420,000 as their expenses, regardless of when the cash was paid.
b) For Case 2:
Sales: Bella Foods made sales of $700,000 during 2012, and out of this amount, they collected cash for all but $30,000. Since the sales were made, they would report the full $700,000 as their sales, regardless of when the cash is collected.
Expenses: Operating expenses amounted to $650,000, and Bella Foods paid $650,000 for these expenses, including $30,000 advance rental. Since the expenses were incurred, they would report the full $650,000 as their expenses, regardless of when the cash was paid.
In summary, the final answers for each case in the statement of profit and loss and other comprehensive income would be:
Case 1:
a) Cash Basis:
- Revenue: $510,000
- Expenses: $400,000
b) Accrual Basis:
- Revenue: $500,000
- Expenses: $420,000
Case 2:
a) Cash Basis:
- Sales: $670,000
- Expenses: $650,000
b) Accrual Basis:
- Sales: $700,000
- Expenses: $650,000