Question

Alberta Storage operates approximately 300? mini-warehouses across Canada. The? company's headquarters are in Medicine? Hat, Alberta. During? 2014, Alberta earned rental revenue of $ 28.0 million and collected cash of ?$27.6 million from customers. Total expenses for 2014 were ?$20.4 ?million, of which Alberta paid ?$17.7 million. Required 1. Apply the recognition criteria for revenues and the matching objective to compute Alberta ?Storage's net income for 2014. 2. Identify the information that you did not use to compute Alberta ?Storage's net income. Give the reason for not using the information

Answer 1

• Requirement 1:

The accrual principal of accounting when read with the matching concept states that Revenues and Expenses are to be recorded in the PERIOD TO WHICH THEY BELONG and IN THE PERIOD THEY ARE EARNED or EXPENSED (respectively), whether the cash has been received or not.

Expanding the above concept, the following points become clear:

---revenues are to be recorded in the period they are earned when they are earned, whether the cash has been RECEIVED or not.
---expenses are to be recorded matching to the period in which they are spent to earn the revenue, whether the cash has been PAID or not.

On the basis of above mentioned principal and concept, net income of Alberta will be calculated as:

Rental Revenues	$ 28 millions
Expenses	$ 20.4 millions
Net Income [28 – 20.4]	$ 7.6 millions

• Requirement 2:

The information that has not been used to compute Net Income is:
--The cash receipt of $ 27.6 millions, and
--The cash payments of $17.7 millions.

These informations have not been used because the accounting is on the accrual basis and not on Cash-basis. Revenues and expenses are recorded when they are earned or paid and not when they are actually received or paid in CASH. Hence, actual revenue earned and actual expenses incurred are used to compute the net income. Cash collection and payment has been ignored following Accrual Concept of accounting.