Question

In its first year of operations, Roma Company reports the following.

Earned revenues of $55,000 ($47,000 cash received from customers).
Incurred expenses of $30,500 ($23,750 cash paid toward them).
Prepaid $9,250 cash for costs that will not be expensed until next year.

Required:
Compute the company’s first-year net income under both the cash basis and the accrual basis of accounting.

Answer 1

Cash Basis $14,000

Accrual Basis $24,500

Step-by-step explanation:

Computation for the company’s first-year net income under both the cash basis and the accrual basis of accounting.

CASH BASIS ACCRUAL BASIS

Revenues $47,000 $55,000

Less Expenses $33,000 $30,500

($23,750+9,250=$33,000)

Net income $14,000 $24,500

Therefore the company’s first-year net income under both the cash basis and the accrual basis of accounting will be :

Cash Basis $14,000

Accrual Basis $24,500