Question

When a veterinary practice measures income in money received, and expenses are measured when money is spent, the practice most likely is using which of the following accounting methods?

1) Accrual-based
2) Cash-based

Answer 1

A veterinary practice that measures income when received and expenses when paid uses the cash-based accounting method. An example provided illustrates calculating a firm's accounting profit by subtracting explicit costs from total revenue, resulting in an accounting profit of $50,000.

Step-by-step explanation:

When a veterinary practice measures income when money is received, and expenses when money is spent, it is most likely using the cash-based accounting method. This method records transactions only when cash changes hands. In contrast, the accrual-based accounting method records income when it is earned and expenses when they are incurred, regardless of when the money is actually received or paid.

Self-Check Question Example

To calculate the firm's accounting profit, you subtract the explicit costs from the total revenue. The explicit costs include labor, capital, and materials which total $950,000 ($600,000+$150,000+$200,000). Therefore, the firm's accounting profit is:

Title: $1,000,000 (Total Revenue)
- $600,000 (Labor Costs)
- $150,000 (Capital Costs)
- $200,000 (Materials Costs)
= $50,000 (Accounting Profit)

It's important to note the difference between accounting profit and economic profit. Accounting profit considers only the explicit costs, whereas economic profit considers both explicit and implicit costs.