ExpertMedium1 markMultiple Choice
CPA · Question 15 · Area I: Financial Reporting
A company prepares its financial statements using the cash basis of accounting. During Year 1, it collected $200,000 from customers. <br/>- Beginning Accounts Receivable: $40,000<br/>- Ending Accounts Receivable: $60,000<br/>- Beginning Unearned Revenue: $10,000<br/>- Ending Unearned Revenue: $5,000<br/><br/>What amount of revenue should be reported on the accrual basis?
A company prepares its financial statements using the cash basis of accounting. During Year 1, it collected $200,000 from customers. <br/>- Beginning Accounts Receivable: $40,000<br/>- Ending Accounts Receivable: $60,000<br/>- Beginning Unearned Revenue: $10,000<br/>- Ending Unearned Revenue: $5,000<br/><br/>What amount of revenue should be reported on the accrual basis?
Answer options:
A.
$215,000
B.
$185,000
C.
$220,000
D.
$225,000
How to approach this question
Start with Cash Collected. Add increase in AR (sales made but not collected). Subtract decrease in AR. Add decrease in Unearned Rev (cash collected previously, earned now). Subtract increase in Unearned Rev (cash collected now, not earned).
Full Answer
D.$225,000✓ Correct
D
Accrual Revenue = Cash Collected + Change in AR + Change in Unearned Revenue (inverse).<br/>1. AR increased by $20,000 ($60k - $40k). This means $20,000 of sales were on credit and not yet collected. Add to cash.<br/>2. Unearned Revenue decreased by $5,000 ($10k - $5k). This means we earned $5,000 of revenue for which cash was collected in prior periods. Add to cash.<br/>Total Accrual Revenue = $200,000 + $20,000 + $5,000 = $225,000.
Common mistakes
Reversing the signs of the adjustments. Thinking Unearned Revenue decrease means less revenue (it means liability went down, so revenue went up).
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