ACCRUAL AND CASH BASES OF ACCOUNTING
The financial statements of Family Health Care for November were prepared under ac-
crual accounting concepts. Entities that use accrual accounting concepts for recording
transactions and preparing financial statements are said to use the accrual basis of
accounting. The accrual basis of accounting is used by large businesses and is required of
publicly held corporations such as Amazon.com,eBay, and Wm. Wrigley Jr. Company.
Entities that record transactions only when cash is received or paid are said to use
the cash basis of accounting. Individuals and small businesses often use the cash basis
of accounting.^1 For example, you probably use a cash basis because your checkbook is116 Chapter 3 Accrual Accounting Concepts
1 Some businesses use modified-cash bases of accounting. These bases of accounting are covered in
advanced accounting texts.Describe how the accrual
basis of accounting
enhances the interpretation
of financial statements.5
Exhibit 7
Integrated Financial Statements—Family Health CareFamily Health Care
Balance Sheet
November 30, 2007Assets Liabilities Stockholders’ Equity
Cash Capital Retained
Stock Earnings
••••
••••
••••
$7,730 $1 8 ,600 $11,000 $ 8 ,510$3 8 ,110 $3 8 ,110
Total Assets Total Liabilities Stockholders’ Equity⎭⎪⎪⎪⎬⎪⎪⎪⎫ ⎭⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎬⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎫
Reconciliation
of cash flows from operations
and net income (see appendix
to this chapter)Family Health Care
Statement of Cash Flows
For the Month Ended Nov. 30, 2007Operating act. $(1,690)
Investing act. (1,700)
Financing act. 3, 800
Increase in cash $ 410
Cash, Nov. 1 7,320
Cash, Nov. 30 $ 7,730Family Health Care
Income Statement
For the Month Ended Nov. 30, 2007Revenues $12,350
Expenses 6,320
Operating income $ 6,030
Other income 360
Net income $ 6,390Family Health Care
Retained Earnings Statement
For the Month Ended Nov. 30, 2007RE, Nov. 1 $ 3,320
Net income 6,390
Dividends (1,200)
RE, Nov. 30 $ 8 ,510