In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the accrual basis of accounting is:
A)$13,000.
B)$21,000.
C)$25,000.
D)$17,000.
E)None of these options are correct

Question

Quizplus · Accepted Answer

Under the accrual basis of accounting, revenue is recognized when earned, regardless of when the cash is received, and expenses are recognized when incurred, regardless of when the cash is paid. Therefore, the net income calculation is as follows:

Revenue earned: $60,000
Expenses incurred: $35,000
Net income: $25,000 ($60,000 - $35,000)

The fact that $8,000 of cash was prepaid for expenses in the following year does not have an impact on the current year's net income, as it relates to future periods.

In Its First Year of Operations, Grace Company Reports the Following