Exercise

Entity A had the following transactions in December 20x1 and January 20x1.

Dec. 5, Purchased 1,000 units of merchandise at $10 per unit in cash.

Dec. 12, Sold 800 units of merchandise at $15 per unit in cash.

Dec. 20, Sold 200 units of merchandise at $15 per unit on account.

Jan. 10, Collected $2,800 cash for the sale on December 20

1. Under cash basis of accounting, what is the amount of revenue for December?

        800 units x $15 = $12,000

2. Under cash basis of accounting, what is the amount of expense for December?

        1,000 units x $10 = $10,000

3. Under cash basis of accounting, what is the amount of profit for December?

        Revenue - Expense = $12,000 - $10,000 = $2,000

4. Under accrual basis of accounting, what is the amount of revenue for December?

        800 units x $15 + 200 units x $15 = $12,000 + $3,000 = $15,000

5. Under accrual basis of accounting, what is the amount of expense for December?

        Cost of merchandise sold = 1,000 units x $10 = $10,000

6. Under accrual basis of accounting, what is the amount of profit for December?

        Revenue - Expenses = $15,000 - $10,000 = $5,000

(A)

(B)

(A) - (B)

Accrual basis

Cash basis

Difference

Revenues

15,000

12,000

3,000

Expenses

10,000

10,000

0

Profit

5,000

2,000

3,000