Acct Problemsets

Chapter 3: Questions 3 & 4

Mini-exercise M3-2

Chapter 1 Problem 1-30 A

Dana E. Laws-Douglas

University of Phoenix

ACC 300

April 28, 2008

Chapter 3 Questions

3. Define accrual accounting and contrast it with cash basis accounting.

“Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments”.

“Cash basis accounting records revenues when cash is received and expenses when cash is paid”.

4. What four conditions must normally be met for revenue to be recognized under accrual basis accounting?

(1). Delivery has occurred or services have been rendered. The company must perform all or substantially all of the acts promised to the customer (by providing goods or services).

(2). There is persuasive evidence of an arrangement for customer payment. In exchange for the company’s performance, the customer must provide cash or a promise to pay cash.

(3). The price is fixed or determinable. The company must be able to put a reliable number on the amount of revenue related to performing the promised acts.

(4). Collection is reasonably assured. For cash sales, collection is never in question since cash is received when promised acts are performed. For credit sales, the company will judge whether cash collection is likely based on a review of the customer’s ability to pay.

Mini-exercises M3-2 Chapter 3:

M3-2 Reporting Cash Basis versus Accrual Basis Income: L01, L02

Assets = Liabilities + Stockholder Equity

|Cash |Notes |Equipment |Building |Notes |Contributed |Retained |

| |Receivable | | |Payable |Capital |Earnings |

|-1,000 |$-7,000 |$-4,000 |...