Description
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.
Explanation & Answer
Attached.
TO:
FROM:
DATE:
SUBJECT: CASH AND ACTURIAL ACCOUNTING
The difference between cash and accrual accounting lies in the timing of when sales and
purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only
when money changes hands, but accrual accounting recognizes revenue when it’s earned, and
expenses when they’re billed (but not paid).
Cash based accounting
The cash basis of accounting recognizes revenues when cash is received, and expenses
when they are paid. This method does not recognize accounts receivable or accounts payable.
Many small businesses opt to use the cash basis of accounting because it is simple to maintain.
It’s easy to determine when a transact...