Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 3-2

TIP: Using the cash basis (method) of accounting, revenues are recognized (recorded and reported) in the period in which they are received and expenses are recognized in the period in which they are paid. The cash basis is not a generally accepted accounting method for income statement reporting. However, the cash basis income figure does appear on the statement of cash flows by the caption “net cash provided (used) by operating activities.”

TIP: Dividends ($100) do not enter into the income computations. Dividends are a distribution of income, not a component of income.

TIP: Using accrual-basis (method) of accounting, revenues are recognized in the period in which the related services are performed and expenses are recognized in the period in which they are incurred.