For the past 7 years, Sam Portafello has been running a small business and has been using the cash basis of accounting to record transactions. He is thinking about inviting family members to invest in the business as he feels the business has the potential to expand if there were more funds. His daughter, Maria, who has just completed a commerce degree, urges him to adopt the accrual basis of accounting so he can better understand the profitability of his business and increase his chances of raising the funds required. Being a stubborn man, he refuses to listen to his daughter and claims that cash is what is important. Maria decides to seek help from a third party to convince her father of the merits of accrual accounting, so she consults an accountant. You are that accountant and Maria ask you to write a report to explain the benefits of accrual accounting to her father. Required: In your report, you should • Briefly explain the difference between accrual and cash accounting. (1 mark) • Identify four items that are recorded differently under cash versus accrual basis of accounting and explain the differences. (Note: your analysis should include one item each from assets, liabilities, revenues and expenses). (4 marks) • Sam’s plan to expand the business requires the purchase of more PPE. Explain the implications of the purchase under the accrual basis and cash basis of accounting and its impact on the statement of financial performance. (2 marks) • Identify and explain an issue with accrual basis of accounting that Sam should be aware of. (2 marks) • Conclude the report by giving your recommendation on whether Sam Portafello should use accrual or cash accounting in his business for the purpose of raising funds.(1 mark)
