Consider each of the five independent situations below.

1. Asia Tea Company purchased a 3-month property insurance policy on March 1 at a cost of $3,600. The insurance became effective immediately although payment was due and paid 45 days later.

2. On February 1, Big Bang Chemical Company signed a contract with a customer. Big Bang agreed to deliver each month, for 3 months, goods priced at $7,500. The first delivery was made on April 1. The customer paid $22,500 for these goods on May 15.

3. Turning Tire Company borrowed $15,000 from a bank on February 1. Terms of repayment are that $1,000 of the principal amount must be repaid on the first day of each following month. In addition, interest at 2% per month on the unpaid balance must accompany each payment.

4. Bureaucrats, Inc. consumes large amounts of office supplies. On February 1, a $10,000 order of supplies was received and paid for. 60% of these supplies were used in March and the rest were used in April. On April 20, a $12,000 order of office supplies was received. The invoice for these goods was paid in May. 30% of these goods were consumed in May and the rest were consumed in June.

5. Sales at the High-Price Furniture Store totaled $45,000 for the month of February. Of this amount, 20% was cash sales, 40% was collected during March, 30% during April, and 10% during May.

Required

A. Determine the proper amount of revenue, expense, and cash flow that should be entered into the accounting system during each month shown. Use the format shown below. The first event is completed as an example.

B. What does this information suggest to you about the pattern in which accrual-based measures are recognized versus cash-based measures?

C. What does this suggest to you about a manager’s need for both accrual information and cash flowinformation?

Transcribed Image Text:

Hevenue Month of Event Cash Flow? February March April Expense, or Month of Month of Month of May Month of June Expense Cash Flow $1,200 $1,200 $1,200 3,600 2. 3. 4. 5.