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. Assignment Steps Resources: 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. Scenario: BizCon, a consulting firm, has just completed its first year of operations. The company’s sales growth was explosive. Additional decisions and events impacted BizCon: 1. To encourage clients to hire its services, BizCon offered 180-day financing – meaning its largest customers do not pay for nearly 6 months. 2. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. 3. Also, it had to pay up front for 2 years of insurance. 4. 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 decisons/events listed in the above scenario and describe the proper accrual accounting for each. 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. For the first bullet, you need to describe the cash and accrual accounting for each scenario and then give the proper accrual accounting entry–a debit and a credit. There are three requirements: Explain the cash accounting, explain the accrual accounting and give the accrual debits and credits. For the second bullet, you need to answer the question in the last sentence. In past classes, the majority of the class has failed this assignment because they do not answer the three questions including the accrual debit and credit entry. The key to success with these assignments is to answer all the questions in them. People lose points most often because they do not directly address and answer the questions. My approach would be to list each of the items in the grading rubric and assignment and answer those questions as they are stated in the assignment. This case is not about BizCon’s strategy, providing general information about cash and accrual accounting, etc. There are good examples of all four scenarios in the text which provide the answers and entries for this assignment. The grading rubric for the paper is attached. Make sure you specifically answer the questions in the assignment and meet the requirements outlined in the grading rubric. The assignment is about cash versus accrual accounting and why a company can have strong net income and yet still have cash flow problems. There is an illustration and example with discussion for every one of the four scenarios in this assignment in the readings. You need to read these sections of the text to successfully meet the requirements of this assignment. Format your assignment consistent with APA guidelines. The UOP instructions say to “prepare a memo” because they want to give some direction about the intent of your writing. There is not an APA format for a memo is best as I know. Start with a proper title page then you can write the body of the paper in a memo style (To: From: Subject: and Date). Include a reference page if you use any sources.

Memorandum

Name

Institution affiliations

Course

Date

Memorandum

Date: march 11, 2019

To:	David Skaros, Production Manager
From:	Accounting Department
Subject:	Delayed wages

Employees have not been paid for one month’s salary due to cash shortfalls presented in the company. The purpose of this memo will be to explain why there are shortfalls of cash within the industry. There are many differences between the cash and accrual methods of accounted and they affect the business concerning employee wages, paying suppliers and the policy involving 180-day financing. The primary purpose revolves around salaries paid to employees during different times of the year and the revenues waiting to be received using the two different accounting methods.

Suppliers have requested to be paid on a cash basis because the business is still a new enterprise and again, the cash basis revolves around recording expenses when cash payments are made. Additionally, employee wages should be paid based on the accrual method of accounting because of the shortfalls concerning cash on hand. The accrual method of accounting records expenses when incurred or consumed; even though, the money has not been paid out to employees. The 180-day customer financing policy recognizes revenue when earned and cash not received can be the underlying reason for the shortfalls of money concerning the accrual method of accounting. The accrual method of accounting recognizes revenue concerning the 180-day financing immediately and accounts receivable; however, the cash basis method would remember tax when cash comes in. This has created an accounting illusion because the revenues are high, but there is a lack of money presented. With employee wages being accounted for using the cash method of accounting, they are paid monthly and not deferred to a future time. The main reason for the lack of cash to pay employee wages is a direct result of the 180-day financing policy because the company is not receiving the money needed to pay employees until after 180 days.

Favorable Net Income

The company has decided to use the accrual method of accounting concerning 180-day financing and not the cash method. Revenues are recorded when they are earned, even though the cash may not be collected for 180 days later or six months. Net Income is presented favorably because of the accrual method that in turn increases the total revenue due to timing. The increase in revenue is substantial because the business is recording a lot of income; however, it has a lack of cash due to the 180-day financing policy. This is why the industry is having difficulty in paying their employee wages. If BizCon utilized the cash basis of accounting, they would present a positive Net Income figure and had enough cash on hand as it dictates revenues and expenses recorded when money flows into or out of the company, respectively. Large payments of money could have been filed if the management could avoid having a financing policy as it creates a lack of cash flow into the company, especially considering the large payments from customers utilizing new services that customers are purchasing in the market.

In conclusion, the cash method of accounting is different from the accrual method of accounting in that, the cash method records revenues when cash flows into the company and expenses when cash flows out of business. The accrual strategy of accounting dictates recording revenues when earned and expenses when incurred or consumed. The main difference existing between the two ways is strategically associated with timing disparity. Revenue is recognized as a delayed manner as income is not identified until cash payments arrive in the company for the cash method. If a company has a long financing policy or a severe debt problem, this is likely to hurt its financial statement presentation. Concerning BizCon, they should use the cash method of accounting that if utilized fully, it can avoid the cash shortage problem in the business and have enough cash at the end of the period to pay their employees. The accrual method revolves around recorded revenue when money has not been exchanged; hence, the company will have substantial revenues without the associated cash on hand to pay employees. Focusing on this can help the company solve its liquidity and solvency problems.

References

Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2016). Accounting: Tools for Business Decision

Making (6th ed.). Hoboken, NJ: John Wiley & Sons.

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To:

David Skaros, Production Manager

From:

Subject:

Delayed wages

Favorable Net Income