# AppendixP2-5.pdf

P2-5

1. This problem continues a thread from P2-1. In P2-1, we observed that the income statement

figure is not the same as the cash involved. The revenue is not the same as the cash received,

and the expense is not the same as the cash paid.

2. The figures on the income statement are the result of our system of accounting where we

record events, like wages, whether we have paid them or not. We state that we “accrue” the

unpaid wages. In general, we state that we have reconciled/compared/converted from cash to

accrual. In this problem we are given cash basis figures and some balance sheet amounts. From that we

are asked to find the income statement figures. Be aware that the question can also be asked in

reverse: given income statement figures and some balance sheet amounts, find the the cash

receipts or payments.

For example, suppose Accounts Receivable (an asset) increase by \$100, Unearned Revenue (a

liability) increases by \$75, and sales (a component of retained earnings) is \$1,000. The

accounting definitional equation must stay intact for the period, so we can imagine that the

changes to both sides of the equation must stay equal. Like this:

Cash + Accounts Receivable = Unearned Revenue + Retained Earnings

X + \$100 = \$75 + \$1,000

Problem statement

Required

From these cash basis figures and the balance sheet amounts, find these figures for the income

statement. 1. Find Sales for August, 20X1 2. Find Salary Expense for August, 20X1. 3. Find Cost of Goods Sold for August, 20X1