You are the Chief Financial Officer in-charge of accounting and finance for your company and the company is applying for a $1,000,000 loan from the bank. As part of the application and loan requirements, the company will need to provide the companys financial statements for the time the loan is outstanding (remains unpaid). The bank requires that all financial statements be presented using the accrual basis of accounting, but your company currently uses the cash basis of accounting. You have to prepare a memorandum to the Chief Executive Officer (CEO) as to why the accrual basis of accounting and recording financial transactions using other aspects of Generally Accepted Accounting Principles is preferred as opposed to the cash basis of accounting. Besides, the bank is going to make this a requirement. In actual business, critical issues and problems are communicated in writing, particularly to create accountability for the positions taken and solutions arrived at. The communication includes relevant background information and rationale and other support for the conclusion(s) reached.

Penn International, Inc. (the Company) has a year end of December 31 and has long used the cash basis of accounting. The company currently uses the cash basis of accounting to record financial transactions and prepare its financial statements (income statement, statement of retained earnings, balance sheet and statement of cash flows). Its founder and CEO, Stephen Castillo, has always believed that you record revenues and issuance of the companys capital stock when cash is received, and acquisition of assets and expenses when these items are paid for. As the CFO, you have responsibilities over all accounting, finance, and financial reporting (i.e., financial statements). You have to convince the CEO why the accrual accounting method is preferable to the cash basis or else the companys potential loan may be in jeopardy. Instructions

Write a memorandum using the following heading and write to Mr. Castillo as to why the Company should use the accrual method of accounting (as opposed to the cash basis method):