BizCon, a consulting firm, has just completed its first year of operations. The company’s sales growth was explosive. To encourage clients to hire its services, BizCon offered 180-day financing – meaning its largest customers do not pay for nearly 6 months. Because BizCon is a new company, its equipment suppliers insist on being paid cash on delivery. Also, it had to pay up front for 2 years of insurance. At the end of the year, BizCon owed employees for one full month of salaries, but due to a cash shortfall, it promised to pay them the first week of next year.
As the senior accountant, the Chief Financial Officer has asked you to prepare a memo to be sent to management notifying them of the delayed wage payments.
Prepare the memo in a maximum 700 words including the following information to better outline the situation:
· Explain how cash and accrual accounting differs for each of the four events/transactions listed above and describe the proper accrual accounting.
· Assess how at the end of the year, BizCon reported a favorable net income, yet the company’s management is concerned because the company is very short of cash. Explain to management how BizCon could have positive net income and yet run out of cash.
There are three requirements for each of the four business transactions above:
For the first bullet point regarding the four transactions, explain the cash accounting, explain the accrual accounting and give the accrual debits and credits for each transaction.
For the second requirement bullet, you need to answer the question in the last sentence. How can BizCon report favorable net income but be short of cash.
This case is not about BizCon’s strategy, providing general information about cash and accrual accounting, etc. There are good examples of all four scenarios in the text which provide the answers and entries for this assignment.
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