Information

 
Question
CPA-08564
Answer
The question is asking for INCOME. The $100,000 is the accrual basis net income. If accounts payable decreased by $6,000 this means that we made a payment of $6,000. Under the cash basis, this would decrease income. Therefore, we subtract the $6,000 from the $100,000. The $6,000 is NOT an expense that is part of the $100,000 because if it's in accounts payable this means that it was already reported as an expense in a previous year under the accrual basis.

The reason why the $10,000 was subtracted is because an increase in receivables means that the revenue has been earned. Under the accrual basis, the $10,000 would be revenue and would increase out income. Under the cash basis, it is not income until collected. Therefore, we subtract the $10,000.
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