Cash Flow as a Measure of Income Stone City Weavers reported the following net income for the month of July, computed on a cash basis:

Stone City Weavers produces high-quality birch-bark baskets.
Sales are made on a cash basis only to tourists who visit the workshop. Due to the unusual nature of the baskets and the highquality workmanship, all baskets are sold on the day they are completed. Raw materials for the baskets are purchased monthly with immediate payment made. All employees are paid for work performed during the month on the last day of the month. Rent on the building is paid on the first day of the month.

a. Does cash-basis income for Stone City appear to accurately reflect its operations?

b. Would a change in sales approach to distribution through a national catalog that features high-quality merchandise affect the accuracy of cash flow as a measure of monthly income? In what way?

c. The owners of Stone City are considering adopting a profitsharing plan for their employees. The company has reported net income in excess of $100,000 each year for the last six years. Under the proposed plan, employees would receive 25 percent of all company profits in excess of $50,000 per year. What effect would the adoption of such a plan have on the accuracy of reported net income on a cash basis?

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Sales $48,000 Less: Cost of goods sold $ 7,000 Salaries and wages 34,000 Rent 2,000 Net Income (43,000) $ 5,000