Assignment Content Purpose of Assignment This week’s activity illustrates the role a company’s accounting method plays in financial statement reporting. In this assignment, students evaluate the events occuring in a business setting and determine how to properly analyze those events to identify the impact on both cash and accrual accounting methods. Resources Accounting Methods Grading Guide Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC) Tutorial help on Excel and Word functions can be found on the Microsoft Office website. There are also additional tutorials via the web offering support for Office products. Assignment Steps Scenario: BizCon, a consulting firm, has just completed its first year of operations. The company’s sales growth was explosive. To encourage clients to hire its services, BizCon offered 180-day financing – meaning its largest customers do not pay for nearly 6 months. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year, BizCon owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year. As the senior accountant, the Chief Financial Officer has asked you to prepare a memo to be sent to management notifying them of the delayed wage payments. Prepare the memo in a maximum 700 words including the following information to better outline the situation: Explain how cash and accrual accounting differs for each of the events listed in the above scenario and describe the proper accrual accounting. Assess how at the end of the year, BizCon reported a favorable net income, yet the company’s management is concerned because the company is very short of cash. Explain to management how BizCon could have positive net income and yet run out of cash.

Memorandum

Date: May 17, 2019

To:	BizCon Management
From:	Senior Accountant
Subject:	Delayed Wage Payments

Cash and Accrual Accounting

The idea of enhancing sales through the implementation of a 180-day financing period can result in smaller value in goods and services. The organization is utilizing the two accounting mechanisms that engage accrual and cash to boost their sales. Cash basis is a strategy used by personal finances and growing businesses and is purposely for profit when fiancés are received and for expenses only when the cash is paid out. On the other hand, with the accrual method, income and expenses are typically recorded as they happen, regardless of whether or not cash has exchanged hands (Goncharov & Jacob, 2014). As per the given case or scenario, BizCon equipment supplier is comfortable with getting paid in cash on delivery basis and the business is entirely recording money; however, it pays through checks, and this will be marked as a contract for instant pay item in account receivable not unless the payment is received. This is considered as accrual accounting where income has been documented but not yet received cash from the buyer. The issue of a supplier needing money upon delivery is also considered as a type of accrual accounting. Since BizCon had to pay two years prior for insurance since they are a new industry, it ought to treat the protection as an asset. When a business finishes its two years of insurance, then it should be put in the non-current assets of the balance sheet.

Favorable Net Income

While the business has witnessed and reported a beneficial income, the administration is still worried about the cash flow since the company has resolved into implementing the 180-day financing booked as income. This scenario will result in the business lacking enough flow of cash in the banks aimed at paying the existing liabilities, including the salary of workers. The only solution to this issue is for the company to lower the number of days and seek more classifications regarding the time of payment. This will, in turn, help acquire more funds for the business and reduce the risk of getting out of finances in the business bank account. When this finally occurs, the company will have a good outlook that is a positive reflection of the financial statements.

Reference

Goncharov, I., & Jacob, M. (2014). Why do countries mandate accrual accounting for tax purposes?. Journal of Accounting Research, 52(5), 1127-1163.

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To:

BizCon Management

From:

Subject: