Reference no: EM132709336

Cash vs. Accrual

Judgment Case

You have recently been hired by Davis & Company, a small public accounting firm. One of the firm's partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city's largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company's records on a cash basis. He does not see the purpose of accrual based statements. His most recent outburst went something like this: "After all, collect cash from customers, pay my bills in cash, and going to pay the bank loan with cash. And, already show building and equipment as assets and depreciate them. just don't understand the problem."

Required:

Problem 1. Explain the difference between a cash basis and an accrual basis measure of performance.