Molly's Auto Detailers maintains its records on the cash basis. During 2009, Molly's collected $72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased $1,000. Molly's accrual basis net income would be:

Question

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Molly's collected $72,000 from customers, so this amount should be recognized as revenue. However, the accrual basis requires us to recognize revenue when it is earned, not just when cash is received. Therefore, we need to adjust for the increase in accounts receivable.

Beginning Accounts Receivable = $0
Ending Accounts Receivable = $4,000
Increase in Accounts Receivable = $4,000

Revenue Earned = $72,000 - $4,000 = $68,000

Molly's paid $21,000 in expenses. However, the accrual basis requires us to recognize expenses when they are incurred, not just when cash is paid. Therefore, we need to adjust for the decrease in accrued liabilities.

Beginning Accrued Liabilities = $0
Ending Accrued Liabilities = -$1,000
Decrease in Accrued Liabilities = $1,000

Expenses Incurred = $21,000 - $1,000 = $20,000

Lastly, we need to adjust for the depreciation expense that would have been recorded on the accrual basis. This is a non-cash expense, so we don't need to adjust for it in terms of actual cash flows.

Net Income on Accrual Basis = Revenue Earned - Expenses Incurred - Depreciation Expense 
Net Income on Accrual Basis = $68,000 - $20,000 - $5,000 
Net Income on Accrual Basis = $43,000

Therefore, the answer is C) $49,000.

Molly's Auto Detailers Maintains Its Records on the Cash Basis