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) $21,000.
B) $13,000.
C) $25,000.
D) $17,000.
E) None of the above.

Question

Quizplus · Accepted Answer

Under the cash basis of accounting, revenue is recognized when cash is received and expenses are recognized when cash is paid. Therefore, the earned revenues of $60,000 are reduced to $52,000 (cash received from customers) and the incurred expenses of $35,000 are reduced to $31,000 (cash paid toward them). The prepaid cash of $8,000 is not expensed until next year and is not included in the current year's net income. 
Net income = cash received from customers - cash paid toward expenses 
Net income = $52,000 - $31,000 
Net income = $21,000 
Therefore, the net income under the cash basis of accounting is $13,000.

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