Andriana Bessemer, a sole practitioner in a rural area, is working in her office when one of her most important clients, Richard Ploughwright, walks in. Mr. Ploughwright operates one of the largest dairy farms in the region.
“I’m sorry to barge in like this, but I’ve just been across the street to see my banker. He suggested that I ask you to explain some matters that affect my financial statements. You’ll recall that I need to renew my loans each year. The new bank manager isn’t very happy with the way my previous statements have been prepared. He has requested that I make some changes to my statements this year before he processes my loan renewal.
“The new banker wants me to switch from the cash basis of accounting to the accrual basis. I don’t quite understand how that will help either him or me. The cash basis provides me with the information I need to evaluate my performance for the year— after all, what I make in a year is the cash left over and in the bank at the end of the year after tending my cattle, selling my milk, and maintaining my dairy barns and equipment. That ending amount of cash is what I use to pay my taxes and the bank. I know the income tax people will accept either the cash or accrual basis from farmers, so why the change for the banker?
“Also, he now wants me to value all of my cattle at market value. I can’t see the benefit of valuing them at market value because I’ll never sell cattle that are still productive. Anyway, some of the cattle are for breeding, not for milking. “I know I must give the bank manager what he wants, but I’d really appreciate knowing why I must make these changes. After all, these changes are just going to increase your bill, which already seems rather high to me, so it’ll be an extra cash drain for me.”
Assume the role of Andriana Bessemer. Respond to Mr. Ploughwright.