Purpose of Assignment

This week's activity illustrates the role a company's accounting method plays in financial statement reporting. In this assignment, students evaluate the events occurring in a business setting and determine how to properly analyze those events to identify the impact on both cash and accrual accounting methods.

Scenario

Advisors LLC, a consulting firm, has just completed its first year of operations with good net income but a low bank (cash) balance.

1. Advisors LLC, offered 180-day financing - meaning its largest customers do not pay for nearly 6 months.
2. Because Advisors LLC, is a new company, its Property Plant & Equipment (PP&E) suppliers insist on being paid cash on delivery. The equipment is depreciated over more than on year.
3. Advisors LLC had to pre-pay in advance for three months of insurance at year end.

As the senior accountant, the Chief Financial Officer has asked you to prepare a memo to be sent to management notifying

them of the low bank balance.

Support

• Accounting: Tools for Business Decision Making-Paul D. Kimmel; Jerry J. Weygandt; Donald E. Kieso
• Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)
• Tutorial help on Excel and Word functions can be found on the Microsoft Office website. There are also additional tutorials via the web offering support for Office products.

Required

• Explain cash versus accrual accounting in general terms with support from the text for each of the three transactions above. Your answer should explain:
• How is revenue different than cash inflow?
• How is depreciation different than the purchase of equipment?
• How are prepaid items recorded on the income statement?