01/15/05 1
Check Your Knowledge
Calculating Net Business Income
Name: _________________________________________
Instructions: Read Example 1, and view the income statement that was generated from
the information below. After reading the completed example, do the exercise on the
following page.
Example 1:
Cash revenues for the year are $150,000 with cash expenses at $90,000. The inventory at
the beginning of the year is $60,000 and the end of the year $35,000. The accounts
payable for this business is $12,000 at the beginning of the year and $16,000 at the end of
the year. Depreciation expense was 12,000.
Revenue Cash Accrual
Cash Business Revenue 150,000 150,000
Non-Cash Revenue Adjustments
Inventory Beg End E-B
60,000 35,000 -25,000 -25,000
Gross Business Revenue =
150,000 125,000
Expenses Cash Accrual
Cash Business expenses - 90,000 90,000
Net Cash Business Income =
60,000
Depreciation - 12,000 12,000
Non-cash Expenses adjustments
Assets Beg End E-B
Prepd Exp 0 0 0
Liabilities Beg End B-E
Accts Payble 12,000 16,000 -4,000
Total Non Cash Expense Adj -4,000 -4,000
Net Business income from Operations 48,000 19,000
Gain/Loss on sale of business assets 0 0
Net business income 48,000 19,000
Explain the calculation__Cash revenue is modified by the difference between ending and
beginning inventory values. Cash expense is modified by the difference between
accounts payable on the two balance sheets. These combine to give a net business iness
income of 19,000 on the accrual basis versus 48,000 on cash basis.
Cash: 150,000 minus 90,000 = 60,000 minus 12,000 = 48,000.
Accrual 150,000 plus (60,000 minus 35,000) = 125,000 minus 90,000 = 35,000 minus
12,000 = 23,000 plus (12,000 – 16,000)= 19,000,
