Question

On January 1, 2020, Norma Smith and Grant Wood formed a computer sales and service company in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January.

1.		Pays $6,000 in advance for 3 months’ rent of office, showroom, and repair space.
2.		Purchases 40 personal computers at a cost of $1,500 each, 6 graphics computers at a cost of $2,500 each, and 25 printers at a cost of $300 each, paying cash upon delivery.
3.		Sales, repair, and office employees earn $12,600 in salaries and wages during January, of which $3,000 was still payable at the end of January.
4.		Sells 30 personal computers at $2,550 each, 4 graphics computers for $3,600 each, and 15 printers for $500 each; $75,000 is received in cash in January, and $23,400 is sold on a deferred payment basis.
5.		Other operating expenses of $8,400 are incurred and paid for during January; $2,000 of incurred expenses are payable at January 31.

Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theory underlying the elements of financial statements.

Answer 1

In cash basis financial statements the transactions are recorded only when revenue is received in cash, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable. The transactions which makes the cash basis financial statements inconsistent with the theory underlying the FS are as follows-:

(1) The purchase on credit basis will also be not included in the cash base FS because the cash has not been paid for the same.

Therefore, purchase of computers and printers are not included in the FS if the cash has not been paid for the same till the end of Financial year.

(2) The amount of salaries and wages that remains outstanding at the year end would not be included in cash basis financial statements.Thus the amount of $ 3000 outstanding at year end is not required to be included in cash base FS.

(3) The amount which is not received on the sale of computers & printers is not required to be included in cash base financial statements.

Therefore, amount of $ 23400 which is to be received on deferred payment basis is not required to be included in Cash basis FS.

(4) The expenses which remains payable at the end of year are not required to be included in cash base FS.

Therefore, outstanding expense of $2000 is not adjusted while preparing the FS on cash basis.

Sorry for any sort of grammatical mistakes?