In the course of your examination of the books and records of Karen Company, you find the following data:
Salaries earned by employees in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,000
Salaries paid in 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,000
Total sales revenue in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 927,000
Cash collected from sales in 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952,000
Utilities expense incurred in 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Utility bills paid in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,300
Cost of goods sold in 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602,000
Cash paid on purchases in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,000
Inventory at December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416,000
Tax assessment for 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,210
Taxes paid in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,930
Rent expense for 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Rent paid in 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,000
Required:
1. Compute Karen’s net income for 2012 using cash-basis accounting.
2. Compute Karen’s net income for 2012 using accrual-basis accounting.
3. Interpretive Question: Why is accrual-basis accounting normally used? Can you see any opportunities for improperly reporting income under cash-basis accounting? Explain.