Using a cash accounting method, what is the net income for the month when a company bills out $38,000, collects $22,000 plus $8,000 from prior month billings, and pays $26,000 this month plus $5,000 for last month?

Using a cash accounting method, what is the net income for the month when a company bills out $38,000, collects $22,000 plus $8,000 from prior month billings, and pays $26,000 this month plus $5,000 for last month?

• A. Income of $1,000
• B. Loss of $1,000
• C. Break-even
• D. Loss of $2,000

Answer: (B)

In cash accounting, you record revenue only when cash is actually received and expenses only when cash is paid. For this month, cash inflows come from 22,000 collected for current-month billings and 8,000 collected from prior-month billings, totaling 30,000. Cash outflows total 26,000 paid for current-month work plus 5,000 paid for last month, totaling 31,000. Net income is the difference: 30,000 minus 31,000 equals a loss of 1,000. The 38,000 billed does not affect this month’s net income because it hasn’t been collected yet. Thus the month shows a net loss of 1,000.

In cash accounting, you record revenue only when cash is actually received and expenses only when cash is paid. For this month, cash inflows come from 22,000 collected for current-month billings and 8,000 collected from prior-month billings, totaling 30,000. Cash outflows total 26,000 paid for current-month work plus 5,000 paid for last month, totaling 31,000. Net income is the difference: 30,000 minus 31,000 equals a loss of 1,000. The 38,000 billed does not affect this month’s net income because it hasn’t been collected yet. Thus the month shows a net loss of 1,000.