Refer to Case 2–1 above. Mr. Pitt has relented and agrees to provide you with the information necessary to convert his cash basis financial statements to accrual basis statements. He provides you with the following transaction information for the fiscal year ending December 31, 2011:
1. A comprehensive insurance policy requires a payment every year for the upcoming year. The last payment of $12,000 was made on September 1, 2011.
2. Mr. Pitt allows customers to pay using a credit card. At the end of the current year, various credit card companies owed Mr. Pitt $6,500. At the end of last year, customer credit card charges outstanding were $5,000.
3. Employees are paid once a month, on the 10th of the month following the work period. Cash disbursements to employees were $8,200 and $7,200 for January 10, 2012, and January 10, 2011, respectively.
4. Utility bills outstanding totaled $1,200 at the end of 2011 and $900 at the end of 2010.
5. A physical count of inventory is always taken at the end of the fiscal year. The merchandise on hand at the end of 2011 cost $35,000. At the end of 2010, inventory on hand cost $32,000.
6. At the end of 2010, Mr. Pitt did not have any bills outstanding to suppliers of merchandise. However, at the end of 2011, he owed suppliers $4,000.
1. Mr. Pitt's 2011 cash basis net income (including depreciation expense) is $26,000. Determine net income applying the accrual accounting model.
2. Explain the effect on Mr. Pitt's balance sheet of converting from cash to accrual. That is, would assets, liabilities, and owner's equity be higher or lower and by what amounts?