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An example and an exercise on calculating net business income on both cash and accrual basis. The example includes calculating gross business revenue, expenses, and net business income from operations. The exercise asks students to calculate net cash and net accrual income for a business given cash revenue, cash expenses, depreciation, inventory, prepaid expenses, and accounts payable.
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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, Non-Cash Revenue Adjustments Inventory Beg End E-B 60,000 35,000 -25,000 (^) -25, Gross Business Revenue = 150,000 125, Expenses Cash Accrual Cash Business expenses - 90,000 90, Net Cash Business Income = 60, Depreciation - 12,000 12, 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, Total Non Cash Expense Adj -4,000^ -4, Net Business income from Operations 48,000 19, Gain/Loss on sale of business assets 0 0 Net business income 48,000 19,
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,
01/15/05 2
Name: __________________________________________
Exercise:
Assume that a business’ cash revenue for the year is $202,470 and cash expenses are $142,810. The depreciation for the year is $17,000. Also there is a gain on the sale of an asset of $1000. The beginning inventory was $110,000 with the ending inventory being $81,000. Additional information includes prepaid expenses at the beginning of the year at $5000; end of the at $3340. Accounts payable at the beginning of the year is $12, and $16,000 at the end of the year. Depreciation for the year is 12,000.
Calculate the net cash and net accrual income for the business.
Revenue Cash Accrual Cash Business Revenue Non-Cash Revenue Adjustments Inventory Beg End E-B
Gross Business Revenue = Expenses Cash Accrual Cash Business expenses - Net Cash Business Income = Depreciation - Non-cash Expenses adjustments Assets Beg End E-B Prepd Exp Liabilities Beg End B-E Accts Payble Total Non Cash Expense Adj Net Business income from Operations Gain/Loss on sale of business assets Net business income
Explain the calculation_____________________________________________________
Complete the exercise and return to your instructor, either on paper, or by email this document to them.