1. CASH VERSUS ACCRUAL ACCOUNTING, ADJUSTING ENTRIES
You have recently been hired by Davis & Company, a small public accounting firm. One of
the firms partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt,
owner of the citys largest hardware store. Mr. Pitt is applying to a local bank for a
substantial loan to remodel his store. The bank requires accrual-based financial statements,
but Mr. Pitt has always kept the companys records on a cash basis. He doesnt see the
purpose of accrual-based statements. His most recent outburst went something After all, I
collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with
cash. And, I already show my building and equipment as assets and depreciate them. I just
dont understand the problems. Required: Draft a memo to Mr. Pitt providing an
explanation of why the bank requests accrual-based financial statements for loan requests
such his. Include in the memo: An explanation of the difference between a cash basis and an
accrual basis measure of performance than net operating cash flow. Why, in most cases, that
accrual basis net income provides a better measure of performance than net operating cash
flow. The purpose of adjusting entries as they relate to the difference between cash and
accrual accounting. Read a selection of your colleagues postings.
