Question

During June, the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers. The company uses the accrual basis of accounting. How will these events affect the company's financial statements?

A. The balance sheet shows no effect from these transactions in May or June.
B. The income statement shows the effects of the transactions in June.
C. The income statement shows the effects of the transactions in May.
D. The balance sheet shows no effect from the transactions in May.

Answer 1

The events will affect the Grass is Greener Company's financial statements by recognizing the revenue on the income statement in June and showing no effect on the balance sheet in May.

Step-by-step explanation:

The events described in the question will affect the Grass is Greener Company's financial statements as follows:

• Option B: The income statement shows the effects of the transactions in June.
• Option D: The balance sheet shows no effect from the transactions in May.

Since the company mowed 100 lawns a week in June and was paid in advance by those customers during May, the revenue from those lawn mowing services would be recognized on the income statement in June. However, since the company was paid in advance during May, there would be no effect on the balance sheet in May since the revenue was already recognized as deferred revenue.