E3-32B. (Learning Objectives 1, 2: Using the accrual basis of accounting; applying accounting principles) During 20X8, Carlton Network, Inc., which designs network servers, earned revenues of €800 million. Expenses totaled €590 million. Carlton collected all but €25 million of the revenues and paid €570 million on its expenses. Carlton’s top managers are evaluating 20X8, and they ask you the following questions:

a. Under accrual accounting, what amount of revenue should Carlton Network report for 20X8? Is it the revenue of €800 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 Carlton report for 20X8—€590 million or €570 million? Which accounting principle helps to answer this question?

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