Reference no: EM133123283
Question 1 - Cash versus Accrual Bases of Accounting - Top Notch Services was founded on January 2 and offers computer consulting and other technology-related services. During its first quarter of operations, the following events occurred:
a. In January, Top Notch provided and billed clients for $40,000 of consulting services. It was paid for these services in March.
b. In January, Top Notch collected $25,000 from clients for services provided during the month.
c. In February, Top Notch provided and billed clients for $45,000 of consulting services. It collected $12,000 in the current month and the remaining amount in March.
d. In March, Top Notch collected $34,000 from clients for services provided during the month and billed clients for an additional $21,000 for services provided.
e. Top Notch pays employees at the end of each month for service provided. Monthly payroll was $12,000, $13,000, and $15,000 in January, February, and March, respectively.
f. Top Notch pays its utility bills at the end of each month. Utility bills totaled $800, $850, and $1,000 in January, February, and March, respectively.
g. Top Notch hired an independent contractor who provided $1,200 of services in February. The contractor was paid in March.
Required - Determine Top Notch's net income for each month from January through March under both the cash and the accrual bases of accounting. Explain any difference in total net income under cash versus accrual accounting for three months.
Question 2 - Cash vs. Accrual - You are provided the following information for Del Campo Consulting Associates.
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2019
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2018
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Service revenue (accrual basis)
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$250,000
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$185,000
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Cash collected from clients
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80,000
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97,000
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Operating expenses:
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Salary expense (accrual basis)
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12,000
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16,500
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Purchased supplies for cash
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4,000
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2,500
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Purchased supplies on account
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1,500
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1,000
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Depreciation expense
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2,000
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2,000
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Rent paid in cash
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7,000
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3,000
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Prepaid insurance
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5,500
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-0-
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Required - Assume that all supplies purchased were used in operations in the year of purchase. Rental payments pertain to rental space used in the year of payment.
a. Prepare an income statement for Del Campo for 2019 and 2018 under both the cash and the accrual basis of accounting.
b. Compute operating cash flow for both years under cash and accrual bases.
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