In its first year of business,Wok 'n' Roll,Inc.earned $100,000 of revenues of which $80,000 was collected.It also incurred $90,000 in expenses for which $80,000 was paid.Which of the following statements are correct?
A) Wok 'n' Roll should use cash basis accounting for external reporting purposes as required under GAAP and IFRS.
B) Wok 'n' Roll should report net income of $10,000 for external reporting purposes.
C) Wok 'n' Roll should report $0 net income for external reporting purposes.
D) Wok 'n' Roll should report net income of $20,000 for external reporting purposes.

Question

Quizplus · Accepted Answer

Under accrual accounting, which is required by GAAP and IFRS for external reporting, revenues and expenses are recognized when they are earned or incurred, not when cash is collected or paid. Therefore, Wok 'n' Roll should report revenues of $100,000 and expenses of $90,000, resulting in a net income of $10,000.

In Its First Year of Business,Wok 'N' Roll,Inc