A company's cash-basis net income for the year ended December 31 was $75,000. The following information is from the company's accounting records:

January 1 December 31

Accounts receivable $15,000 $20,000

Prepaid expenses 7,000 4,000

Accrued liabilities 2,500 2,000

What is the accrual-basis net income?

$72,500

$75,000

$77,500

$83,500

Answer: The accrual-basis net income is $77,500.

Explanation:

We know that the company's net cash income on December 31 is $ 75,000, which is why it is our base, we start from here.

Accounts receivable between January 1 and December 31 increased by + 5000. (A flow of funds did not occur but it is a fact that is recorded according to the accrual principle).

Prepaid expenses decreased (-3000). (Prepaid expenses are a credit to the company and decrease over time).

The accumulated liabilities decreased by + 500. (it is positive because a decrease in the liability means a lower debt for the company.)

Then we calculate from the base: $75000 + 5000 - 3000 + 500 = $77500