The accounting department at Klinger Realty sent the financial reports, as shown below, to Robin Garrison, general manager. Attached was a note indicating that both sets of data are based on the same set of events, which occurred during the quarter just completed. Robin was only recently promoted to this position and is not very knowledgeable about accounting information. After reviewing this report, Robin was somewhat disturbed because she always had thought accounting was an exact process. How, she wondered, can there be two different results from the same set of facts? Furthermore, how could they be so different? Which one is the €œtrue€ or €œcorrect€ report?

Required
Assume that you are called in to advise Ms. Garrison. Write a memo to her explaining why there can be two measures of operating results and why theydiffer.

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Klinger Realty Results of Operating Activities Third Quarter, 2004 Cash Basis Accrual Basis Cash receipts/revenues: Sales commissions Property management $300,000 210,000 $400,000 Total $810,000 15.000 $510,000 $565,000 Cash payments/expenses: Office employee wages Advertising Office supplies Depreciation-office (48,000) (90,000) (3,400) (53,000) (10,000) equipment Rent Sales staff commission:s Property managers' salaries 0 (6,000) (150,000) (116.000) (1,800) (6,000) 200,000) (90,000) Total 335,000 Net cash flow Net income $125,800