Question

• If you were an investor in a rent-to-own business that takes more than a year to collect revenues while the customers take immediate possession of the goods: Would you prefer to have the income statement prepared by cash basis or by accrual basis and why?

Answer 1

If I was an investor in this business, in which revenues are collected in a future period of time and the possession of goods are transferred to costumer immediately. I would prefer accrual basis of accounting for preparing income statements rather than cash basis of accounting.

In Accrual basis of accounting revenue are recorded when it is earned by the business. That means the revenue is recorded at the time when goods and services are delivered to customers with the expectation of receiving money in a future period of time.

Here in this business the revenue are collected in a future period of time while the possession of goods are transferred immediately to the customer so the accrual basis of accounting will be suitable for preparing income statements accurately. Because the accrual method is more accurate than the cash basis, as the accrual concept includes accounts receivables and accounts payable .It makes income statements more accurate and helps to provide a clearer picture of the profitability of the business.

In cash basis of accounting revenues are recorded when money is received .and the expenses are recorded when it is paid .Here it takes more than one year to collect revenue while possession of product is transferred immediately . so the cash basis is not suitable for this business for preparing income statements .