Question

On May 1, Faux Furs, Inc., collected $35,000 from its customers. One quarter of the $35,000 was earned in May and the rest in June through August. During May, Faux Furs' had $4,000 in expenses of which only $2,000 had been paid. How much higher would Faux Furs' net income be in May if it used cash-basis accounting instead of accrual accounting? Do not include $ in your answer.

Answer 1

Accrual basis of accounting:

Revenues in May = 35000 / 4 = 8750

Expenses in May = 4000

Net income of May = 8750 - 4000 = 4750

Cash basis of accounting:

Revenues in May = 35000

Expenses in May = 2000

Net income of May = 35000 - 2000 = 33000

Difference of net income if cash basis is used instead of accrual basis = 33000 - 4750 = 28250 (higher)

Hence under cash basis, the net income would be higher by 28250 when compared with the accrual basis of accounting