Reference no: EM132508848

Point 1: DEF Industries, a private company, is considering a change to the cash basis of accounting from the accrual basis of accounting. This year, DEF reported $140,000 of total accrual basis expenses on the income statement. At the beginning of the year, DEF had of $21,000 of accrued expenses and $8,000 of prepaid expenses. At the end of the year, DEF had $18,000 of accrued expenses and $4,000 of prepaid expenses. DEF also reported $12,000 of depreciation expense for the year, but paid no cash for PP&E during the year.

Question 1: What would be the difference in net income if DEF reported the current year expenses on the cash basis, instead of the accrual basis?

1. Net income would decrease by 19,000 if expenses were recorded on the cash basis.
2. Net income would decrease by 11,000 if expenses were recorded on the cash basis.
3. Net income would decrease by 5,000 if expenses were recorded on the cash basis.
4. None of the other answer choices is correct.
5. Net income would increase by 5,000 if expenses were recorded on the cash basis.
6. Net income would increase by 11,000 if expenses were recorded on the cash basis.
7. Net income would decrease by 13,000 if expenses were recorded on the cash basis.
8. Net income would increase by 19,000 if expenses were recorded on the cash basis.
9. Net income would increase by 13,000 if expenses were recorded on the cash basis.