E3-19A. (Learning Objectives 1, 2: Using accrual accounting; applying accounting principles)

During 20X8, Carson Network, Inc., which designs network servers, earned revenues of

$850 million. Expenses totaled $560 million. Carson collected all but $30 million of the revenues and paid $610 million on its expenses. Carson’s top managers are evaluating 20X8, and they ask you the following questions:

a. Under accrual accounting, what amount of revenue should Carson Network report for 20X8? Is the revenue the $850 million earned or is it the amount of cash actually collected?

How does the revenue principle help to answer these questions?

b. Under accrual accounting, what amount of total expense should Carson Network report for 20X8—$560 million or $610 million? Which accounting principle helps answer this question?

c. Which financial statement reports revenues and expenses? Which statement reports cash receipts and cash payments?