Rita’s Roses: Cash vs. Accrual Basis Accounting (2011)
Rita’s Roses: Net Income Calculation for 2011
In the course of your examination of the books and records of Rita’s Roses for the year ending December 31, 2011, you find the following data:
- Cash paid for new equipment on 1/1/2011: $150,000
- Total Sales (cash and credit) for 2011: $750,000
- Accounts Receivable, 1/1/2011: $193,300
- Accounts Receivable, 12/31/2011: $154,100
- Salaries earned by employees: $60,000
- Salaries owed to employees, 1/1/2011: $4,500
- Salaries owed to employees, 12/31/2011: $6,700
- Other expenses paid in 2011: $25,000
- Other expenses incurred in 2011: $40,000
- Depreciation on new equipment: $30,000
Required: Compute Rita’s net income for 2011 using cash-basis and accrual-basis accounting.
1. Net Income on Cash Basis:
Cash collected from sales
Total Sales: $750,000
Accounts Receivable, 12/31/2011: ($154,100)
Accounts Receivable, 1/1/2011: $193,300
Total Cash Collected: $789,200
Expenses:
Salaries Earned: $60,000
Salaries Owed, 1/1/2011: $4,500
Salaries Owed, 12/31/2011: ($6,700)
Net Salaries Paid: $57,800
Other expenses paid: $25,000
Depreciation: $30,000
Total cash expenses: $112,800
Net cash income: $676,400
2. Net Income on Accrual Basis:
Total Sales: $750,000
Expenses:
Salaries Earned: $60,000
Other expenses incurred: $40,000
Depreciation: $30,000
Total expenses: $130,000
Net income: $620,000