Question

Question: In its first year of operations, Roma Company reports the following:

∙ Earned revenues of \(45,000 (\)37,000 cash received from customers).

∙ Incurred expenses of \(25,500 (\)20,250 cash paid toward them).

∙ Prepaid $6,750 cash for costs that will not be expensed until next year.

Compute the company’s first-year net income under both the cash basis andthe accrual basis of

accounting.

Short answer

Net income on a cash basis is $16,750.

Net income on an accrual basis is $12,750

Step-by-step solution

Step-by-Step SolutionStep 1: Net income on a cash basis

While calculating net income, we only include cash revenue and cash expenses.

$$\begin{gathered} \mathbf{Net} \mathbf{Income}\mathbf{=} \mathbf{Cash} \mathbf{Received} \mathbf{-} \mathbf{Expenses} \mathbf{Paid} \mathbf{in} \mathbf{cash} \\ \mathbf{=} \mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{250} \\ \mathbf{=} \mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{750} \end{gathered}$$

Net income on an accrual basis

While calculating net income on the accrual basis, we include cash and non-cash revenue

$$\begin{gathered} \mathbf{Net} \mathbf{Income}\mathbf{=}\mathbf{Revenue} \mathbf{-} \mathbf{Expenses}\mathbf{-}\mathbf{Prepaid} \mathbf{Expenses} \\ \mathbf{=} \mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{25}\mathbf{,}\mathbf{500}\mathbf{-}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{750} \\ \mathbf{=} \mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{750} \end{gathered}$$