ACC 305 Week 1 DQ2 - Judgment
Case 2-1, Judgment Case 3-6
Judgment
Case 2-1 You have recently been hired by Davis & Company, a small
public accounting firm. One of the firm’s partners, Alice Davis, has asked you
to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest
hardware store. Mr. Pitt is applying to a local bank for a substantial loan to
remodel his store. The bank requires accrual based financial statements but Mr.
Pitt has always kept the company’s records on a cash basis. He does not see the
purpose of accrual based statements. His most recent outburst went something
like this: “After all, I collect cash from customers, pay my bills in cash, and
I am going to pay the bank loan with cash. And, I already show my building and
equipment as assets and depreciate them. I just don’t understand the problem.”
Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.
2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?
Judgment Case 3-6 You recently joined the auditing staff of Best, Best, and Krug, CPAs. You have been assigned to the audit of Clearview, Inc., and have been asked by the audit senior to examine the balance sheet prepared by Clearview’s accountant.
Required:
Identify the items in the statement that most likely would require further disclosure either on the face of the statement or in a note. Further identify those items that would require disclosure in the significant accounting policies note.
Identify the items in the statement that most likely would require further disclosure either on the face of the statement or in a note. Further identify those items that would require disclosure in the significant accounting policies note.
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