Answer to Question #197357 in Accounting for Milan

Question

A company reports on the cash basis. During the company's first year of business, it had sales

on account of $1,000,000, inventory purchases on account of $400,000, and other expenses of

$200,000. At the end of the year, the company had accounts receivable, inventory, and

inventory related accounts payable of $100,000, $10,000, and $50,000, respectively. What is

the company's cash-basis income for its first year of operations?

A. $300,000

B. $350,000

C. $400,000

D. $450,000

Answer 1

The answer is B. $350,000

Calculations:

Net sales revenues = Total sales - account receivable (debtors)= $ (1000,000 - 100,000) = $900,000

Net expenditure on purchases = Total purchases - Account payable (Creditors) = $ (400,000 - 50,000) = $350,000

Other expenses = $200,000

$\therefore$ Cash-basis income = totals sales revenues - net purchases expenditure - other expenses

= $(900,000 - 350,000 - 200,000)

= $350,000

NOTE: Cash-basis income accounting, unlike accrual accounting, take into consideration income when received and expenses when paid out.