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Consider the following set of transactions occurring during the month of May for Bison Consulting Company. For each transaction, indicate the impact on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income for May. The first answer is provided as an example.Impact on:
(a) Receive $1,500 from customers whowere billed for services in April.
(b) Provide $3,200 of consulting servicesto a local business. Payment is notexpected until June.
(c) Purchase office supplies for $400 onaccount. All supplies are used by theend of May.
(d) Pay $600 to workers. $400 is for work inMay and $200 is for work in April.
(e) Pay $200 to advertise in a localnewspaper in May.Totals
Cash Balance+$1,500 _____ _____ _____ __________ Cash-Basis Net Income+$1,500 _____ _____ _____ __________Accrual-Basis Net Income$0 _____ _____ _____ __________

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Answer:

Cash Balance+$1,500 -$200 - $400-$200

Cash-Basis Net Income+$1,500 - $200 - $400-$200

Accrual-Basis Net Income$0+ $3200-$400 - $400-$200

Explanation:

The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid.

The impact of the transactions on the cash and incomes given will be:

a. Receive $1,500 from customers who were billed for services in April.

  • Cash balance = $1500
  • Cash basis Net income = $1500
  • Accrual-basis net income = 0

(b) Provide $3,200 of consulting services to a local business. Payment is not expected until June.

  • Cash balance = 0
  • Cash basis Net income = 0
  • Accrual-basis net income = $3200

(c) Purchase office supplies for $400 on account. All supplies are used by the end of May.

  • Cash balance = 0
  • Cash basis Net income = 0
  • Accrual-basis net income = -$400

(d) Pay $600 to workers. $400 is for work in May and $200 is for work in April.

  • Cash balance = -$600
  • Cash basis Net income = -$600
  • Accrual-basis net income = -$400

(e) Pay $200 to advertise in a local newspaper in May.

  • Cash balance = -$200
  • Cash basis Net income = -$200
  • Accrual-basis net income = -$200

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