In its first year of operations,Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year.Net income under the cash basis of accounting is:
A)$17,000.
B)$21,000.
C)$13,000.
D)$25,000.
E)None of the answer choices is correct.

Question

Quizplus · Accepted Answer

Under the cash basis of accounting, revenues and expenses are recognized only when cash is received or paid. Therefore, the earned revenues of $60,000 are not all recognized because only $52,000 cash was received. Similarly, the incurred expenses of $35,000 are not all recognized because only $31,000 cash was paid. The prepaid $8,000 cash is not expensed until next year. Thus, the net income under the cash basis of accounting is $21,000 ($52,000 - $31,000 - $8,000), which corresponds to answer choice C.

In Its First Year of Operations,Grace Company Reports the Following