Chance Corporation began operating a new retail business in the current year and had $500,000 of sales, $70,000 of which had not been collected by year-end. Total purchases were $350,000 on which $30,000 is still owed. Ending inventory is $60,000; operating expenses are $170,000, $50,000 of which is still owed at year-end.
a. Compute net income from the business under the accrual method.
b. Compute net income from the business under the cash method.
c. Would paying the $50,000 she owes for operating expenses before year-end change her net income under the accrual method? Under the cash method?
* $60,000 - $30,000 (amount still owed) = $30,000.
c. Paying the $50,000 will not change the net amount of business income under the accrual method. Under cash method, payment of the $50,000 expense would result in a $30,000 net loss.
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