Question

Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies
textbooks to college and university bookstores. The books are shipped with a proviso
that they must be paid for within 30 days but can be returned for a full refund
credit within 90 days. In 2009, Thomas shipped and billed book titles totaling
$760,000. Collections, net of return credits, during the year totaled $690,000. The
company spent $300,000 acquiring the books that it shipped.
a. Using accrual accounting and the preceding values, show the firm’s net profit for
the past year.
b. Using cash accounting and the preceding values, show the firm’s net cash flow
for the past year.
c. Which of these statements is more useful to the financial manager? Why?

Answer 1

In case of accrual system of accounting, all the revenue and expenses which accrued during the year are considered as part of net income
In case of cash system, cash receipts and cash payment made during the year are considered as part of net income
a.
Calculate net profit under accrual accounting
Sales	$760,000
Less: Costs of goods sold	$300,000
Net profit	$460,000
b.
Calculate net profit under cash accounting
Sales	$690,000
Less: Costs of goods sold	$300,000
Net profit	$390,000
c.
Both the statement are useful to financial manager. The type of statement to be use depends on the information the manager is looking from the statement.
The accrual system of accounting would provide better information on the business operation of the company
The cash system of accounting is helpful to determine the cash generated from operations.