Question

In its first year of operations, Roma Company reports the following. Earned revenues of $65,000 ($57,000 cash received from customers). Incurred expenses of $35,500 ($27,250 cash paid toward them). Prepaid $11,750 cash for costs that will not be expensed until next year. calculate the first year's net income under both the cash basis and the accrual basis of accounting.

Answer 1

$18,000

$29,500

Step-by-step explanation:

Workings

Total Revenue- $65,000

Cash Revenue earned - $ 57,000

Total Expenses - $ 35,500

Total cash expenses - $27,250

Prepaid cash -$11,750

First year net cash income - $(57,000-27,250 - 11,750) = 18,000

First year net Accrued income $( 65,000- 35,500)

Note

In cash accounting method , all transactions in cash are identified and recognized for revenue and expenses purpose except payment for asset acquisition and loan repayment While in the accrual method ,revenue are recorded when earned and expenses recorded when incurred

Answer 2

Cash accounting $18,000

Accrual accounting $37,750

Step-by-step explanation:

Under the cash accounting, all the cash expense are deemed expenses other than payments to lenders and purchase of assets, and cash revenue as revenue. So this means:

Cash revenue include $57,000 received from customers and cash expense includes $27,250 and prepared cash expense.

So, under cash accounting:

Revenue $57,000

Expense ($27,250 + $11,750) ($39,000)

Profit $18,000

Under Accrual accounting system, the revenues are recorded when they are earned (not when received) and expenses are recorded when they are incurred (not when paid).

Earned revenues are $65,000 and incurred expense are $35,500. Kindly note under accrual accounting, prepaid expenses are assets (not expenses).

So, under accrual accounting:

Revenue $65,000

Expense ($27,250)

Profit $37,750