Accounting Methods

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Business Finance

Description

Purpose of Assignment

This week's activity illustrates the role a company's accounting method plays in financial statement reporting. In this assignment, students evaluate the events occuring in a business setting and determine how to properly analyze those events to identify the impact on both cash and accrual accounting methods.

Assignment Steps

Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)

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Scenario: BizCon, a consulting firm, has just completed its first year of operations. The company's sales growth was explosive. To encourage clients to hire its services, BizCon offered 180-day financing - meaning its largest customers do not pay for nearly 6 months. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year, BizCon owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year.

As the senior accountant, the Chief Financial Officer has asked you to prepare a memo to be sent to management notifying them of the delayed wage payments.

Prepare the memo in a maximum 700 words including the following information to better outline the situation:

  • Explain how cash and accrual accounting differs for each of the events listed in the above scenario and describe the proper accrual accounting.
  • Assess how at the end of the year, BizCon reported a favorable net income, yet the company's management is concerned because the company is very short of cash. Explain to management how BizCon could have positive net income and yet run out of cash.

Format your assignment consistent with APA guidelines.

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Explanation & Answer

Attached.

Running Head: ACCOUNTING METHODS

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ACCOUNTING METHODS
Name
Course
Professor
Date

ACCOUNTING METHODS

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ACCOUNTING METHODS

TO: BizCon Management
FROM: Mary Smith, Senior Accountant
DATE: 12/4/2017
SUBJECT: Delayed Wage Payments
With the first year of its operations coming to an end, BizCon has had its fair share of success
and challenges. Following the cash shortages facing BizCon at the end of the first year of its
operations, this memo seeks to bring to your attention, as the management of the firm, that the
firm will not be in a position to meet pay its staff their one-month wages in in good time. As this
years’ financial period comes to a close, BizCon has encountered some shortages in cash and as
a result, the firm will not be in a position to pay employees the one-month salaries owed to them,
but will instead make these payments during the first week of the next year.
Despite reporting positive growth in sales, BizCon still fell short of cash, and this could be
attributed to the different methods of accounting that the firm uses to conduct and record its
transactions. BizCon employs two methods of accounting namely, the cash and accrual methods,
which differ in many aspects as it relates to recognition of revenue and expenses. With regards to
the cash basis of accounting, revenue is recognized only when cash is received, and expenses
accounted for when cash is paid. The accrual method of accounting, on the other hand,
recognizes revenue when earned and expenses when incurred, and cash does not have to change
hands (Weil, Schipper & Francis, 2013).

ACCOUNTING METHODS

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In the case of BizCon, various events bring out the difference between the two methods and
show how they affected the cash balance of the entity. Since we are a new firm, suppliers
insisted on being paid cash upon de...


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