Question

Objective Of The Assignment

To prepare a memorandum to the chief executive officer (CEO) as to why the accrual basis of accounting and recording financial transactions using other aspects of Generally Accepted Accounting Principles is preferred (not just mandatory) as opposed to the cash basis of accounting.

In actual business, critical issues and problems are communicated in writing, particularly to create accountability for the positions taken and solutions arrived at. The communication includes relevant background information and rationale and other support for the conclusion(s) reached.

Background Information For the Assignment

Huntington Consulting, Inc. (the Company) has a year-end of December 31 and has long used the cash basis of accounting. Its founder and CEO, Carl Singer, has always believed that you record revenues and issuance of capital stock when cash is received, and assets and expenses when paid for. You are the new controller and have responsibilities overall accounting and financial reporting. You have decided to communicate to Carl Singer, CEO, why the accrual accounting method is preferable to the cash basis.

Instructions

Write a memorandum using the following heading and write to Mr. Singer as to why the Company should use the accrual method of accounting (as opposed to the cash basis method):

To:            Carl Singer, CEO

From:      “Your Name”

Subject: Why the Company Should Use the Accrual Method of Accounting

The memo should not exceed a full page using single space, but if it is longer, that is fine. In your memo, address why the accrual basis of accounting is preferred [to the cash basis] and include the importance of accounting periods, matching, and using classified financial statements (i.e., balance sheet for this assignment). Also, include why the financial statements prepared under the accrual method will help make better management decisions.

To make this easier, include the following accounts to make your points:

• Accounts Receivable
• Prepaid Insurance
• Equipment (in this case, laptop computers and other computer equipment)
• Accrued liabilities (i.e., salaries & wages and interest on a loan with the bank)
• Unearned Revenue

Answer 1

Answer is as under:

To:            Carl Singer, CEO

From:      Hardi Takolia , Finance controller

Subject: Why the Company Should Use the Accrual Method of Accounting

Dear Mr. Carl Singer,

Accrual accounting means all expenses and revenues are recognized in the financials as and when they occur instead of accounting it on cash basis (on actual payment and receipt basis). It is base on matching principle. Sir, there are many advantages due to which accrual basis of accounting is prefer over cash accounting

The matching concept of expenses and revenue will help you to conduct more useful business analysis. It will help to comply with Generally Accepted Accounting Principle. This will help in preparing comparative financial statement which are prepared on quarterly and yearly basis. Also the data of outstanding account receivable and payable can be maintain properly which will help to understand inflow and outflow of cash. Liability and assets will show correct position to external stake holders. When we are able to predict future outflow of cash and inflow of cash , we can easily plan our asset liability.

Sir, In my opinion recording transaction on accrual basis will help to reduce our tax liability. Expenses such as advance rent , insurance paid etc. needs to be classified to next year for the time period in which there benefit will get utilized. Hence accurate reporting of expenses will help in calculation of tax liability.

Sir, Kindly let me know if any further details required regarding the implementation of accrual method of accounting

Your Faithfully

Hardi Takolia,

Finance controller