Acc 561 week 2

ACCOUNTING METHODS 1

ACCOUNTING METHODS 5

ACCOUNTING METHODS

BizCon

Memorandum

To: The Management Staff

From: Taneitha Kendrick

Subject: Delayed Wages

Date: Monday June 4, 2019

We are delighted to announce that the sales for the year was a success. While the sales and income are on the rise, our current cash flow remains at a record low. In order to get the account of the consulting market, we offered a 180-day financial option to our top clients. This means that no income will come in from them for nearly 6 months. Since we have not received any funds from them, our sales are under estimated because we are performing on a cash basis. If we were on an accrual basis, we could accrue the services performed, and our income would increase. Using this method of accounting we will record the funds from customers before they are paid to the bank. In order to remain in GAAP standards, the debits and credits for any transaction should equal to each other so the account is in balance. Unfortunately, the cash flow is in deficit because of money paid for the startup equipment and the prepaid insurance policy for all of last year. We used the cash basis of accounting for those that did not offer financial extension. However, this account does not account for the accounts payable or receivables.

Cash vs. Accounts

The graph below indicates the financial activity of the company and explains the reasons for late wage payments. The cash basis account may be misleading because it indicates Biz Con having a positive net income for the current year unfortunately, it will fall short on cash flow. To further explain, cash and accrual accounting are different however at the end of the year, Biz Con will benefit using both methods. Biz Con will receive a positive net income by using the accrual method on the larger clienteles and it is recorded as revenue. The company will use the cash-based method of accounting for the pre-paid insurance and supplies up front which is recorded as expenses for the company and results in a lack of cash flow.

2016

2017

Activity

Equipment

Sales

Insurance

Salaries

Accrual Basis

Revenue 1000

Revenue 0

Expense 400

Expense 0

Net Income 600

Net Income 0

Cash Basis

Revenue 0

Revenue 1000

Expense 400

Expense 0

Net Loss -400

Net Income 1000

For example: $2,000 paid to supplier=$1,000 cash flow in the financial reporting period which resulted in a negative cash flow. Also, a total of $350, 000 was paid up front for insurance which are taxable of $150,000 first year. Therefore, the company is in the negative for the years of $250, 000 (350,000-250,000). Although the company is making revenue there were more money spent in expenses.

By using both methods, Biz Con will be able to show our staff that we have not forgotten about them, very much appreciate them and will have finances for payments at the beginning of next year. We will be short on cash flow but will be in the clear very soon. I hope my explanation is clear and to your understanding. We will like to apologize for the delay in payments. We ask for you to be patient a little longer and forgive us for any inconveniences this may have caused. We realize that we all need to meet monthly obligation and circumstances such as this is a problem. You all are what makes this company a success. You are valued and I hope that you continue to grow with the company and reap on our success. This is a scary, transitioning phase and soon it will be over. Once we start to receive funds from the larger clients, we will begin to start the process of distributing payments.

Thanks you for your understanding,

Taneitha Kendrick, Senior Accountant

The above memo explained the situation that Biz Con are in at this current time. It explains the payments that was distributed for insurance and supplies in advance to keep the business growing. It also explains the cash and accrual methods of accounting and how they have worked in a positive way to boost Biz Con’s revenue. Biz Con’s is a consulting firm that in the first year of operation, the sales was a success. The company offered 180-day financing to the elite clientele which means the largest customers did not have to pay for the first two quarter of the year. However, because the company was fairly new the supplier insisted to be paid in advance for the first two years. Biz Con owed employees a month salary at the end of the year because of advanced payments for supplies. At this time, the company experienced a cash shortage and was not able to pay the employees, therefore promised to pay them the first week of the following year. As the senior accountant for Biz Con, the Chief Financial Officer asked that I prepare a memo that will be sent to management notifying them of the delayed wage payments.

References

Kimmel, P. D., Weygandt, J.J., & Kieso, D.E. (2016). Accounting: Tools for Business Decision Making (6th ed.). Hoboken, NJ: John Wiley & Sons.

McCool, Cameron. (2017) Cash Basis Accounting vs. Accounting. Bench. Retrieved from https://bench.co/syllabus/accounting/cash-accounting-vs-accrual-accounting/.

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