Is accrual-based budgeting preferable to cash-based budgeting?

The Disability Research Institute receives its funding mainly from government grants and private contributions. In turn, it supports research and related projects carried out by universities and other not-for-profits. Most of its government grants are reimbursement (expenditure-driven) awards. That is, the government will reimburse the institute for the funds that it disburses to others.

The institute estimates that the following will occur in the forthcoming year:

• It will be awarded $5 million in government grants, all of which will be paid out to sub-recipients during the year. Of this amount, only $4.5 million will be reimbursed by the government during the year. The balance will be reimbursed in the first six months of the next year. The institute will also receive $200,000 in grant funds that were due from the previous year.
• It will receive $600,000 in pledges from private donors. It expects to collect $450,000 during the year and the balance in the following year. It also expects to collect $80,000 in pledges made the prior year.
• It will purchase new furniture and office equipment at a cost of $80,000. It currently owns its building, which it had purchased for $800,000, and additional furniture and equipment, which it acquired for $250,000. The building has a useful life of twenty-five years; the furniture and equipment have a useful life of five years.
• Employees will earn wages and salaries of $340,000, of which they will be paid $320,000 during the forthcoming year and the balance in the next year.
• It will incur other operating costs of $90,000, of which it will pay $70,000 in the forthcoming year and $20,000 in the next year. It will also pay another $10,000 in costs incurred in the previous year.

1.

Prepare two budgets, one on a cash basis and the other on afullaccrual basis. For convenience show both on the same schedule, with the cash budget in one column and the accrual in the other column.

2.

Comment on which budget better shows whether the institute is covering the economic cost of the services that it provides.

3.

Which is likely to be more useful to

• a.Institute managers?
• b.Members of the institutes board of trustees?
• c.Bankers from whom the institute seeks a loan?