ACCRUAL ACCOUNTING AND GAAP ACTIVITY 26 Purpose Understand accrual accounting and how it differs from cash accounting Apply the Realization Concept and the Matching Concept GAAP requires companies to use accrual occounting to report revenues and expenses, which mit companies must comply with the Revenue Recognition and Matching Principles described below GAAP #2: Accountants record revenue according to the Revenue Recognition Principle. This revenues are recorded in the period earned, not necessarily in the period that the COMO collects the money. Revenues are typically earned when merchandise is delivered or when services are provided On December 1 Year 1 RETAIL STORE sells a $1,500 computer. Customer Nancy pays 5500 inash 01 and signs an installment agreement for the remaining $1,000 to be paid the following year, Year On the income statement of RETAIL STORE, how much revenue should be recognized? a. In Year 1 b. In Year 2 $ a. GAAP #3: The Matching Principle requires accountants to record expenses in the period they help te generate revenues. Therefore: 1) If there is an associated cause and effect, report the expense in the same period as the revenues it helped to generate. Examples include cost of goods sold and commissions 2) If no association can be found, then expense immediately. Examples include advertising, utility, and administrative expenses. 3) If neither (1) nor (2) apply, then use a systematic and rational allocation method if you can. Examples include depreciation and amortization Q2 In this accounting period, CYCLES GALORE purchased 10 bicycles for $200 each at wholesale and sold 6 bicycles for $500 each to customers. On the income statement of CYCLES GALORE, how much will be reported for: Sales revenue? 5 b. Cost of goods sold? $ c. Gross profit? $ d. The cost of the four unsold bicycles will remain part of (inventory / COGS / retained earnings) reported on the (BS/IS/RE/CF). What amount will be reported? $ Q3 Klger Kayaking, a sporting goods retailer, began operations on August 1 with the following transactions during the first month of operation. Compute August net income (using accrual-based accounting) and the August 31 cash balance. Accrual Cash $ s Aug 1 Paid August office rent of $4,000. $ $ Aug 5 Purchased and paid $32,000 for merchandise inventory. $ Sold merchandise for $54,000 to customers at retail that Aug 16 cost $20,000 wholesale. Received cash from customers $ Aug 17 Received and paid a $1.500 advertising bill for August September, and October $ $ Aug 30 Paid September office rent of $4,000. XXXXXXX $ Aug 31 Change in cash balance $ XXXXXXX Aug 31 August net income $ $