Cash Basis Versus Accrual Basis

Accrual Basis VS. Cash Basis – Income Statement

Numbers 1 and 2
Gerald Company had the following account balances for 2021.
December 31 January 1
Accounts payable 500,000 650,000
Inventory 300,000 250,000
Accounts receivable 800,000 900,000
Prepaid expenses 400,000 600,000
 All sales and purchases of inventory were on account.
 Depreciation expense of P900,000 was recognized during 2021.
 Equipment was sold during 2021 and a gain of P300,000 was recognized.
The entity provided the following cash flow information for 2021:
Cash collected from customers 9,500,000
Cash paid to suppliers 4,100,000
Cash paid for other expenses 1,400,000
1) What is the net income under accrual basis?
A.3,900,000
B.3,000,000
C.3,300,000
D.4,000,000
2) What is the net income under cash basis?
A.3,400,000
B.4,050,000
C.4,000,000
D.3,450,000
Cash Basis To Accrual Basis – Single Account
Numbers 3, 4 and 5
Kinesis Company paid or collected during 2021 the following items:
Insurance premiums paid 25,450
Salaries paid 116,300
Interest collected 53,750
The following balances were from Kinesis Company’s balance sheets:
December 31, 2020 December 31, 2021
Prepaid insurance 2,400 1,700
Interest receivable 4,700 3,200
Salaries payable 12,300 10,600
3) The insurance expense on the income statement for 2021 was
A.26,150
B.25,750
C.24,750
D.23,750
4) The interest revenue on the income statement for 2021 was
A.55,250
B.53,750
C.52,250
D.50,550
5) The salary expense on the income statement for 2021 was
A.118,000
B.116,300
C.114,600
D.105,700
Accrual Basis To Cash Basis – Single Account
Number 6, 7 and 8
Martyr Company paid or collected during 2021 the following items:

Interest revenue 75,500

Insurance expense 9,600
Salaries expense 65,000
The following balances were from Martyr Company’s balance sheets:

December 31, 2021 December 31, 2020

Interest receivable 7,500 9,100
Salaries payable 4,200 8,900
Prepaid insurance 1,500 1,100
6) The cash received for interest during 2021 was
A.77,100
B.75,500
C.73,900
D.66,400
7) The cash paid for salaries during 2021 was
A.73,900
B.69,700
C.60,800
D.60,300
8) The cash paid for insurance premiums during 2021 was
A.10,000
B. 9,200
C. 8,500
D. 8,100

Accrual Basis To Cash Basis – Dual Account, Income

9) Under the accrual basis, rental income of Lion’s Pride Company for the current calendar year is P60,000. Additional
information regarding rental income are:

Accrued rental income, December 31 4,000

Accrued rental income, January 1 3,000
Unearned rental income, December 31 7,500
Unearned rental income, January 1 5,000

How much actual cash rental was received by Lion’s Price Company in the current year?
A.65,500
B.62,500
C.61,500
D.58,500

Cash Basis To Accrual Basis – Dual Account, Other Income

10) Time of Babe Co. has the following information:

Accrued rent income – January 1 1,600,000

Accrued rent income – December 31 800,000
Unearned rent – January 1 1,200,000
Unearned rent – December 31 2,000,000
Rental payments received 4,000,000

How much is the rent income under accrual basis of accounting?

A.4,000,000
B.2,400,000
C.5,600,000
D.4,800,000

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Accrual Basis To Cash Basis – Dual Account, Other Expense
11) Elemental Company borrows money under various loan agreement involving notes discounted and notes requiring
interest payments at maturity. During the current year ended December 31, Elemental paid interest totaling
P5,000,000. The balance sheets included the following:

December 31 January 1
Interest payable 2,500,000 2,000,000
Prepaid interest 1,500,000 500,000

How much interest expense should Elemental report for the current year?
A.6,500,000
B.5,500,000
C.4,500,000
D.3,500,000

Cash Basis To Accrual – Dual Account, Other Expense

12) Lind Company reported operating expenses of P285,000 for 2020. The following data were extracted from the
company’s financial records:

December 31, 2019 December 31, 2020

Prepaid expenses 60,000 69,000
Accrued expenses 210,000 255,000

On a statement of cash flows for 2020, using the direct method, cash payments for operating expenses should be:
A.339,000
B.321,000
C.249,000
D.231,000

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