Question

(L07) (Cash and Accrual Basis) Wayne Rogers Corp. maintains its financial records on the cash basis of accounting. Interested in securing a long-term loan from its regular bank, Wayne Rogers Corp. requests you as its independent to convert its cash-basis income statement data to the accrual basis. You are provided with the following summarized data covering 2016, 2017, and 2018

	2016	2017	2018
Cash receipts from sale
On 2016 sales	\(295,000	\)160,000	\(30,000
On 2017 sales	0	\)355,000	\(90,000
On 2018 sales	0	0	\)408,000
Cash payments for expenses:
On 2016 expenses	\(185,000	\)67,000	\(25,000
On 2017 expenses	\)40,000a	\(160,000	\)55,000
On 2018 expenses	0	\(45,000b	\)218,000

a Prepayments of 2017 expenses.

b Prepayments of 2018 expenses.

Instructions

(a) Using the data above, prepare abbreviated income statements for the years 2016 and 2017 on the cash basis.

(b) Using the data above, prepare abbreviated income statements for the years 2016 and 2017 on the accrual basis.

Short answer

Net income is calculated by subtracting the expenses from the sales revenue.

Step-by-step solution

Meaning of Income Statements

Business entities prepare a statement to ascertain the profit earned by the business entity during the financial year is the income statement. It includes all the income earned and expenses incurred during the year.

Part (a) Abbreviated Income Statement for Years 2016 and 2017 on Cash Basis

Wayne Rogers Corp Income Statement (Cash Basis) For the Year Ended December 31
Particulars	2016	2017
Sales	$295,000	$515,000
Less Expenses	$(225,000)	$(272,000)
Net Income	$70,000	$243,000

Working Note:

$$\begin{gathered} \text{Cash Expenses of Year 2016}=\left(\text{Cash Expenses for Year 2016} \\ +\text{Prepayment of Expenses of Year}2017\right) \\ =\$185,000+\$40,000 \\ =\$225,000 \end{gathered}$$

$$\begin{gathered} \text{Cash Sale of Year 2017}=\left(\text{Cash Received for Sale in Year 2016} \\ +\text{Cash Sale of Year}2017\right) \\ =\$160,000+\$355,000 \\ =\$515,000 \end{gathered}$$

$$\begin{gathered} \text{Cash Expenses of Year 2017}=\left(\text{Cash Expenses Paid for Year 2016} \\ +\text{Cash Expenses of Year}2017 \\ +\text{Prepayment of Expenses of Year 2018}\right) \\ =\$67,000+\$160,000+\$45,000 \\ =\$272,000 \end{gathered}$$

Part (b) Abbreviated Income Statement for Years 2016 and 2017 on Accrual Basis

Wayne Rogers Corp Income Statement (Accrual Basis) For the Year Ended December 31
Particulars	2016	2017
Sales	$485,000	$445,000
Less Expenses	$(277,000)	$(255,000)
Net Income	$208,000	$190,000

Working Note:

$$\begin{gathered} \text{Sales for Year 2016}=\sum \text{Summation of Sales Related to Year 2016} \\ =\$295,000+\$160,000+\$30,000 \\ =\$485,000 \end{gathered}$$

$$\begin{gathered} \text{Expenses for Year 2016}=\sum \text{Summation of Expenses Related to Year 2016} \\ =\$185,000+\$67,000+\$25,000 \\ =\$277,000 \end{gathered}$$

$$\begin{gathered} \text{Sales for Year 2017}=\sum \text{Summation of Sales Related to Year 2017} \\ =\$355,000+\$90,000 \\ =\$445,000 \end{gathered}$$

$$\begin{gathered} \text{Expenses for Year 2017}=\sum \text{Summation of Expenses Related to Year 2017} \\ =\$40,000+\$160,000+\$55,000 \\ =\$255,000 \end{gathered}$$