Week 2 EOC: Chapter 2, Question 4

Answers:

a. Lisa's accrual accounting shows a higher net profit of $10,750.

b. Lisa's cash accounting shows the most accurate amount on hand because, "a cash accounting system is a method that records revenue as being earned when it is actually received." (pg. 49 Managerial Accounting for the Hospitality Industry.) It works like a checking account. When money is deposited it adds to your current cash balance. When money is withdrawn it decreases your current cash balance.

c. "In an accrual accounting system, revenue is recorded when it is earned, regardless of when it is collected, and expenses are recorded when they are incurred, regardless of when they are paid." (pg. 49 Managerial Accounting for the Hospitality Industry.)

d. Lisa's accrual accounting most accurately shows her expenses of $34,250 incurred regardless of when they were paid.

e. An accrual account would be best used to show actual cash inflow and outflows. This allows you to spread your money out and see where it is going to be used regardless of when you pay/paid it.

f. "If an accrual system is used then the business should consistently report its financial information. As a result, a restaurant will be able to see a more accurate idea of its true profitability." (pg. 50 Managerial Accounting for the Hospitality Industry.)