Molly's Auto Detailers maintains its records on the cash basis. During 2013, 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 was:

Question

Quizplus · Accepted Answer

To convert from cash basis to accrual basis, we need to take into account the changes in accounts receivable, prepaid expenses, and accrued liabilities.

Starting with the cash basis net income of $72,000 - $21,000 = $51,000, we need to make the following adjustments:

- Add the decrease in accounts receivable: +$4,000
- Subtract the decrease in prepaid expenses: -$2,000
- Add back the decrease in accrued liabilities: +$1,000
- Add back the depreciation expense: +$5,000

Adjusted accrual basis net income = $51,000 + $4,000 - $2,000 + $1,000 + $5,000 = $59,000

Therefore, the best choice is C) $49,000.

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