Reference no: EM132639397

Question 1: Mr. Pitt's 2018 cash basis net income (including depreciation expense) is $26,000. Determine net income applying the accrual accounting model.

Accrual Accounting Model

Insurance                       12,000

Accounts Receivable         6,500                 5,000

Salaries                          8,200                 7,200

Utilities                          1,200                    900

Inventory                     35,000                   32,000

Suppliers                         (4000)

Accrual Net Income is $33, 000, determine as follows...

Cash Basis Net Income           $26,000

Add: Insurance 12,000 x 8/12 = 8,000

Add: Accounts Receivable = 6, 500 - 5, 000 = 1,500

Deduct: Salaries Payable 8,200 - 7,200 = (1,000)

Deduct: Utilities 1,200 - 900 = (300)

Add: Inventory 35,000 - 32,000 = 3,000

Deduct: Suppliers = (4,000)

Accrual Basis Net income = $33, 000

Question 2: Explain the effect on Mr. Pitt's balance sheet of converting cash to accrual. That is, would assets, liabilities, and owner's equity be higher or lower and by what amounts?