I am having trouble with this handout that i am studying for my midterm. I need a step by step guide for how you convert each account from cash to accrual when making the balance sheet and income statement. I have attached the answer also, so this should be easy, i just need a step by step. Especially when converting to accrual, such as why Accounts receivable effects sales when converting etc.

Handout 5 Mega keeps its accounting records on a cash basis during the year. At year end, it converts its books to the accrual basis for preparing its financial statements. At the end of 2015, Mega reported the following post-closing trial balance after converting it to the accrual basis. [Hint: These will also be the beginning balances for 2016.] Cash Accounts receivable Supplies Inventory Equipment Accumulated depreciation Accounts payable (for inventory) Salaries payable Income tax payable Common stock Retained earnings December 31, 2015 (accrual) Debit Credit $ 2,700 4,200 2,100 5,600 12,000 $ 4,800 6,100 500 2,000 7,000 6,200 At the end of 2016, you are asked to convert Mega's books from cash basis to accrual basis and prepare a balance sheet and income statement on an accrual basis. To do so, you are provided with the following information: You are provided with the following information as of December 31, 2016: Cash receipts from customers 67,300 Cash payments: To vendors (for inventory) 30,600 To employees 15,500 For prepaid supplies 2,500 For other operating expenses (OE) 5,500 To stockholders 6,000 For the 2015 income tax liability that was paid on March 15, 2016 with tax returns 2,000 Other information: Customers owed Mega Mega owed vendors (for inventory) Mega owed employees Physical count of inventory Physical count of supplies Income tax rate for 2016 5,900 7,000 900 6,300 1,000 25% Mega depreciates its equipment using the straight-line method over 10 years with no salvage value. Assume that the balance given for other operating expenses (OE) is the same for both cash and accrual. Required: Using accrual basis accounting, prepare a 2016 income statement and a 2016 balance sheet. Handout 5 Cash Basis Sales Cost of goods sold Gross profit Change Accrual Basis $67,300 +1,700 A/R Increase $69,000 30,600 +900 A/P Increase -700 Inv Increase 30,800 $36,700 $38,200 Salaries expense $15,500 Supplies expense 2,500 Depreciation expense 0 Dividends 6,000 Other OE 5,500 $15,900 + 400 S/P Increase +1,100 Supplies Decrease 3,600 +1,200 1,200 -6,000 5,500 $29,500 $26,200 IBIT $ 7,200 Income tax expense 2,000 $12,000 3,000 Total expenses Net income $ 5,200 $9,000 Beginning Inventory Purchases Cost of Goods Available Ending Inventory Cost of Goods Sold $ 5,600 31,500 $37,100 6,300 $30,800 Cash purchases $30,600 Plus: A/P increase 900 $31,500 Mega, Inc. Income Statement For the year ended December 31, 2016 Sales Beginning inventory Purchases Cost of goods available for sale Less: Ending Inventory Cost of goods sold Gross profit Operating expenses: Salaries expense Supplies expense Depreciation expense Other operating expenses Total operating expenses Income before income taxes Income tax expense Net income $69,000 $ 5,600 31,500 $37,100 6,300 30,800 $38,200 $15,900 3,600 1,200 5,500 26,200 $12,000 3,000 $ 9,000 Mega, Inc. Balance Sheet December 31, 2016 Cash Accounts receivable Supplies Inventory Equipment Less: Accumulated depreciation Total assets $ 7,900 5,900 1,000 6,300 $12,000 6,000 6,000 $27,100 Accounts payable Salaries payable Income tax payable Total liabilities $ 7,000 900 3,000 $10,900 Common stock Retained earnings Total stockholders' equity 7,000 9,200 $16,200 Total liabilities and stockholders' equity $27,100