Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed
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 $860,000. Collections, during the year totaled $777,952. The company spent $352,570 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? 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? (Select the best answer below.) 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 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. C. 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. 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Short Term Financial Management

Authors: John Zietlow, Matthew Hill, Terry Maness

5th Edition

1516512405, 9781516512409

More Books

Students also viewed these Finance questions