Discussion $3-$ Cash versus accrual accounting

To get full$-$credit you need to reply to the both prompt and provide a reply to one of your classmates.

Prompt $1-$ You have recently been hired by Davis & Company, a small public accounting firm. One of the firm's partners, Alice Davis has asked

you to deal with a disgruntled client, Mr$.$ Sean Pitt, owner of the city's largest hardware store. Mr$.$ Pitt is applying to a local bank for a substantial

loan to remodel his store. The bank requires accrual$-$based financial statements, but Mr$.$ Pitt has always kept the company's records on a cash

basis. He doesn't see the purpose of accrual$-$based statements. His most recent outburst went something like this: "After all, I collect cash from

customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and

depreciate them. I just don't understand the problem."

Draft a memo to Mr$.$ Pitt providing an explanation of why the bank requests accrual$-$based financial statements for loan requests such as his.

Include in the memo:

An explanation of the difference between a cash basis and an accrual basis measure of performance.

Why, in most cases, that accrual$-$basis net income provides a better measure of performance than net operating cash flow.

The purpose of adjusting entries as they relate to the difference between cash and accrual accounting.