Pat's Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat's collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued liabilities increased $2,500. Pat's accrual basis net income would be:
A)$18,000.
B)$34,000.
C)$23,000.
D)$29,000.

Question

Quizplus · Accepted Answer

To convert from cash basis to accrual basis, adjust for changes in accounts receivable, supplies, and accrued liabilities. Start with cash collected ($42,000) and subtract cash expenses ($14,000). Add back non-cash expenses like depreciation ($2,000). Adjust for increases in accounts receivable (-$1,500), supplies (-$4,000), and accrued liabilities (+$2,500). The calculation is: $42,000 - $14,000 + $2,000 - $1,500 - $4,000 + $2,500 = $29,000.

Pat's Custom Tuxedo Shop Maintains Its Records on the Cash