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.”Draft a memo to the client to explain the importance of accrual based financial statements make sure you: explain the difference between a cash basis and an accrual basis measure of performance describe why in most cases accrual basis net income provide a better measure of performance than net operating cash flow and explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.
