| Under the cash basis of accounting, a firm
recognizes revenues from selling goods and providing Services in the period when
it receives cash from customers. It reports{{U}} (19) {{/U}}in the
period when it makes cash expenditures for merchandise, salaries, insurance,
taxes, and{{U}} (20) {{/U}}items. To illustrate the measurement of
performance under the cash basis of accounting, consider the following
example. Donald and Joanne Allens open a hardware store on January 1, Year 1. The firm receives $20,000{{U}} (21) {{/U}}cash from the Aliens and borrows $12,000 from a local bank. It must repay the loan on June 30, Year 1, with interest charged{{U}} (22) {{/U}}the rate of 12 percent per year. The firm rents a store building on January 1, and pays 2 months' rent of $4,000{{U}} (23) {{/U}}. On January 1, it also pays the premium of $ 2,400 for property and liability insurance coverage for the year{{U}} (24) {{/U}}December 31, Year 1. During January it acquires merchandise costing $40,000, {{U}}(25) {{/U}}it purchases $26,000 for cash and $ 14,000 on account. Sales to customers during January total $50,000, of which $34,000 is for{{U}} (26) {{/U}}and $16,000 is on account. The acquisition cost of the merchandise{{U}} (27) {{/U}}during January is $32,000,and various employees receive $5,000 in salaries. Lawyers, accountants, and{{U}} (28) {{/U}}professionals are the principal entities that use the cash basis of ac counting. These professionals have{{U}} (29) {{/U}}small investments in multiperiod assets, {{U}}(30) {{/U}}buildings and equipment, and usually collect cash from clients soon after they{{U}} (31) {{/U}}services. Most of these firms actually use a modified cash basis of accounting, under which they{{U}} (32) {{/U}}the costs of buildings, equipment, and similar items as assets{{U}} (33) {{/U}}. Most individuals use the cash basis of accounting for the purpose of computing personal income and person al income taxes. |