Use the information below and the Excel template to construct an accrual based income statement for calendar year 2018 for the Y Business. Complete the I/S and the worksheet included in the Excel template. Some items are already completed for you. You will need to compute all remaining subtotals and income measures in the empty cells.

1. Explain the difference between cash and accrual accounting methods and why the differences between a cash and accrual income statement can be very significant

2. Define Accrual Adjustments and explain why they are needed on an accrual based income statement

3. Given the balance sheet and transaction information given above, what major investment purchase was made by Y Business in 2018

4. List all items NOT used in completing the accrual based income statement for Y Business and briefly describe why they were not used in preparing the I/S.

Y Business Name: September 17, 2019 Today's date: Balance Sheet Date: Income Statement for period: Beginning: Ending: January 1, 2018 December 31, 2018 Fed. Marginal Tax Rate: 25.00% SE rate: 15.30% State Inc. Tax rate 5.00% Type of Business Business accrual INCOME STATEMENT For the period:January 1, 2018 to: December 31, 2018 Item Subtotal Total Line REVENUES AND ADJUSTMENTS Sales: Cash receipts 910,000 (1) Other business income (2) Accrual adjustments: Inventories (3) Accounts Receivable 19,000 (4) $929,000 Gross revenue 929,000> (5) OPERATING AND INTEREST EXPENSES AND ADJUSTMENTS Operating Expenses: 660,000 Cash operating expenses Accrual adjustments: Accounts payable (6) (7) Prepaid Expenses (8) Supplies Work in progress (9) (10) Other accrued expenses and items (11) Depreciation (12) Total Operating Expense (13) Interest Expenses: Amount of interest paid in cash 19,000 (14) Accrual adjustments: Accrued interest (15) Total Interest Expense (16) Total Operating and Interest Expense 0>> (17) Net income from operations $929,000 (18) Gains/losses on sales of capital assets (19) $929,000 Net income before taxes and non-business adjustments (20) NON-BUSINESS ITEMS Non-business wages (21) Non-business interest and dividends (22) Other non-business income (23) Gains/losses on sales of nonbusiness assets (24) $0 Total nonbusiness income 0 (25) $929,000 Net income before taxes (26) TAX EXPENSES AND ADJUSTMENTS Amount of tax paid in cash 58,000 (27) Accrual adjustments: Income and social security taxes (28) Current portion of deferred taxes (29) $58,000 Total Tax Expense 58,000> (30) $871,000 NET INCOME (31) Selected Balance Sheet Entries Line No. if Adjustment Notes 19,000 Revenue adjustment Use on I/S 12/31/17 12/31/18 Assets: Accounts Receivable Supplies Inventories completed goods Prepaid Expenses Market Value of Brewery Investment Market Value of all Real Estate (4) 19,000 9,500 41,000 31,000 68,000 440,000 8,000 37,000 29,500 65,000 Liabilities: Current Portion of Deferred Taxes 1,133 53,000 16,000 10,000 21,000 3,000 11,552 49,000 Accounts Payable Notes payable within 1 year Accrued interest (current and non-curr) Accrued income and soc. sec. taxes Other accrued expenses and items 18,000 23,000 4,000 Other Items/transacti ons: Cost of land purchased in 2018 Cost of buildings purchased in 2018 Cash tax expenses paid in 2018 Cash interest expense paid in 2018 Amount Notes 140,000 300,000 58,000 19,000 910,000 660,000 85,000 (27) (14) (1) (6) Cash sales for 2018 Cash operating expenses for 2018 Cost of machinery and equipment purchased in 2018 Total depreciation expense taken in 2018 Used equipment with a tax basis of $15,000 sold in 2018 for $10,000 Dividends received from brewery investment for 2018 42,000 ??? 3,000 Selected Balance Sheet Entries Line No. if Use on /S Adjustment 19,000 12/31/2017 12/31/2018 Assets: Accounts Receivable Supplies Inventories completed goods Prepaid Expenses Market Value of Brewery Investment Market Value of all Real Estate (4) 19,000 9,500 41,000 8,000 37,000 29,500 31,000 68,000 440,000 65,000 Liabilities: Current Portion of Deferred Taxes Accounts Payable Notes payable within 1 year Accrued interest (current and non-curr) Accrued income and soc. sec. taxes Other accrued expenses and items 1,133 53,000 16,000 11,552 49,000 10,000 21,000 3,000 18,000 23,000 4,000 Other Items/transactions: Cost of land purchased in 2018 Cost of buildings purchased in 2018 Cash tax expenses paid in 2018 Cash interest expense paid in 2018 Cash sales for 2018 |Cash operating expenses for 2018 Cost of machinery and equipment purchased in 2018 Total depreciation expense taken in 2018 Used equipment with a tax basis of $15,000 sold in 2018 for $10,000 Dividends received from brewery investment for 2018 Amount 140,000 300,000 58,000 19,000 910,000 660,000 85,000 42,000 (27) (14) (1) (6) ??? 3,000 Y Business Name: September 17, 2019 Today's date: Balance Sheet Date: Income Statement for period: Beginning: Ending: January 1, 2018 December 31, 2018 Fed. Marginal Tax Rate: 25.00% SE rate: 15.30% State Inc. Tax rate 5.00% Type of Business Business accrual INCOME STATEMENT For the period:January 1, 2018 to: December 31, 2018 Item Subtotal Total Line REVENUES AND ADJUSTMENTS Sales: Cash receipts 910,000 (1) Other business income (2) Accrual adjustments: Inventories (3) Accounts Receivable 19,000 (4) $929,000 Gross revenue 929,000> (5) OPERATING AND INTEREST EXPENSES AND ADJUSTMENTS Operating Expenses: 660,000 Cash operating expenses Accrual adjustments: Accounts payable (6) (7) Prepaid Expenses (8) Supplies Work in progress (9) (10) Other accrued expenses and items (11) Depreciation (12) Total Operating Expense (13) Interest Expenses: Amount of interest paid in cash 19,000 (14) Accrual adjustments: Accrued interest (15) Total Interest Expense (16) Total Operating and Interest Expense 0>> (17) Net income from operations $929,000 (18) Gains/losses on sales of capital assets (19) $929,000 Net income before taxes and non-business adjustments (20) NON-BUSINESS ITEMS Non-business wages (21) Non-business interest and dividends (22) Other non-business income (23) Gains/losses on sales of nonbusiness assets (24) $0 Total nonbusiness income 0 (25) $929,000 Net income before taxes (26) TAX EXPENSES AND ADJUSTMENTS Amount of tax paid in cash 58,000 (27) Accrual adjustments: Income and social security taxes (28) Current portion of deferred taxes (29) $58,000 Total Tax Expense 58,000> (30) $871,000 NET INCOME (31) Selected Balance Sheet Entries Line No. if Adjustment Notes 19,000 Revenue adjustment Use on I/S 12/31/17 12/31/18 Assets: Accounts Receivable Supplies Inventories completed goods Prepaid Expenses Market Value of Brewery Investment Market Value of all Real Estate (4) 19,000 9,500 41,000 31,000 68,000 440,000 8,000 37,000 29,500 65,000 Liabilities: Current Portion of Deferred Taxes 1,133 53,000 16,000 10,000 21,000 3,000 11,552 49,000 Accounts Payable Notes payable within 1 year Accrued interest (current and non-curr) Accrued income and soc. sec. taxes Other accrued expenses and items 18,000 23,000 4,000 Other Items/transacti ons: Cost of land purchased in 2018 Cost of buildings purchased in 2018 Cash tax expenses paid in 2018 Cash interest expense paid in 2018 Amount Notes 140,000 300,000 58,000 19,000 910,000 660,000 85,000 (27) (14) (1) (6) Cash sales for 2018 Cash operating expenses for 2018 Cost of machinery and equipment purchased in 2018 Total depreciation expense taken in 2018 Used equipment with a tax basis of $15,000 sold in 2018 for $10,000 Dividends received from brewery investment for 2018 42,000 ??? 3,000 Selected Balance Sheet Entries Line No. if Use on /S Adjustment 19,000 12/31/2017 12/31/2018 Assets: Accounts Receivable Supplies Inventories completed goods Prepaid Expenses Market Value of Brewery Investment Market Value of all Real Estate (4) 19,000 9,500 41,000 8,000 37,000 29,500 31,000 68,000 440,000 65,000 Liabilities: Current Portion of Deferred Taxes Accounts Payable Notes payable within 1 year Accrued interest (current and non-curr) Accrued income and soc. sec. taxes Other accrued expenses and items 1,133 53,000 16,000 11,552 49,000 10,000 21,000 3,000 18,000 23,000 4,000 Other Items/transactions: Cost of land purchased in 2018 Cost of buildings purchased in 2018 Cash tax expenses paid in 2018 Cash interest expense paid in 2018 Cash sales for 2018 |Cash operating expenses for 2018 Cost of machinery and equipment purchased in 2018 Total depreciation expense taken in 2018 Used equipment with a tax basis of $15,000 sold in 2018 for $10,000 Dividends received from brewery investment for 2018 Amount 140,000 300,000 58,000 19,000 910,000 660,000 85,000 42,000 (27) (14) (1) (6) ??? 3,000