Accrual income versus cash flow for a period.$$Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within $30$ days. For simplicity, assume there are no returns and no bad debts $($i$.$e$.,$ bookstores pay on time$).$ This year, Thomas shipped and billed book titles totaling $$620,000.$ Collections, during the year totaled $$559,381.$ The company spent $$243,862$ acquiring the books that it shipped.

a$.$Using accrual accounting and the preceding values, show the firm's net profit for the past year.

b$.$ Using cash accounting and the preceding values, show the firm's net cash flow for the past year.

c$.$ Explain why the accrual and cash accounting methods show different net profits. How do the two profit figures provide different information to the financial manager?

Part $1$

a$.$Using accrual accounting and the preceding values, show the firm's net profit for the past year in the following table.$($Round to the nearest dollar.$)$

Part $2$

Part $3$

Accounting View

$($accrual basis$)$

Thomas Book Sales, Inc.

Income Statement

for the Year Ended $12/31$

Sales revenue $enter

Less: Costs

enter

Net profit $enter

b$.$ Using cash accounting and the preceding values, show the firm's net cash flow for the past year in the following table. $($Round to the nearest dollar.$)$

Financial View

$($cash basis$)$

Thomas Book Sales, Inc.

Cash Flow Statement

for the Year Ended $12/31$

Cash inflow $enter

Less: Cash outflow

enter

Net cash flow $enter

Part $7$

Explain why the accrual and cash accounting methods show different net profits. How do the two profit figures provide different information to the financial manager?

A$.$

The income statement is more useful because it recognizes revenues at the time of sale $($whether payment has been received or not$)$ and recognizes expenses when they are incurred.

B$.$

A financial manager will find the cash flow statement more useful. Accounting net income includes uncollected revenues that do not contribute to owner wealth. Cash flows, not accounting profits, matter to shareholders. The cash flow statement is more useful because it recognizes amounts that will not be collected and, as a result, will not contribute to the wealth of the owners.

C$.$

A financial manager will find the income statement more useful. Accounting net income includes uncollected revenues that do not contribute to owner wealth. Cash flows, not accounting profits, matter to shareholders. The

income

statement is more useful because it recognizes amounts that will not be collected and, as a result, will not contribute to the wealth of the owners.

D$.$The cash flow statement is more useful because it recognizes revenues at the time of sale $($whether payment has been received or not$)$ and recognizes expenses when they are incurred.