Molly's Auto Detailers maintains its records on the cash basis. During the year, Molly's collected $72,800 from customers and paid $20,100 in expenses. Depreciation expense of $3,900 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $5,900, prepaid expenses decreased $1,700, and accrued liabilities decreased $1,200. Molly's accrual-basis net income was:Single choice
A
$51,800.
B
$96,800.
C
$54,200.
D
$43,400.

Question

Molly's Auto Detailers maintains its records on the cash basis. During the year, Molly's collected $72,800 from customers and paid $20,100 in expenses. Depreciation expense of $3,900 would have been recorded on the accrual basis. Over the course of the year, accounts receivable increased $5,900, prepaid expenses decreased $1,700, and accrued liabilities decreased $1,200. Molly's accrual-basis net income was:Single choice

A

$51,800.

B

$96,800.

C

$54,200.

D

$43,400.

BlackTom AI · Accepted Answer

Question restatement: Molly's Auto Detailers uses cash basis; cash collected from customers was 72,800 and cash paid for expenses was 20,100. Accrual basis would have recorded depreciation expense of 3,900. Over the year, accounts receivable increased by 5,900, prepaid expenses decreased by 1,700, and accrued liabilities decreased by 1,200. We are asked to determine Molly's accrual-basis net income for the year.

Option A: $51,800.
To evaluate accrual net income, first determine accrual revenue and accrual expenses.
- Accrual revenue = cash collected from customers plus any increase in accounts receivable (since more revenue was earned than collected). Here, AR increased by 5,900, so accrual revenue = 72,800 + 5,900 = 78,700.
- Accrual expenses include all cash expenses paid (20,100), plus noncash depreciation (3,900), plus any adjustments from changes in working capital that affect how much expense is recognized in the period: a decrease in prepaid expenses (meaning we used up 1,700 of prepaid assets, which increases expense) and a decrease in accrued liabilities (we paid more cash to settle prior period liabilities, which reduces current period expense). The net calculation for accrual expenses is: 20,100 + 3,900 + 1,700 + 1,200 = 26,900.
- Therefore, accrual net income = 78,700 (revenue) − 26,900 (expenses) = 51,800.
This matches the value in Option A.

Option B: $96,800.
This would imply either a much higher accrual revenue or a much lower accrual expense than the values derived above. Notably, revenue would have to be near 78,700 with expenses far lower than 26,900, or revenue would need to be substantially higher, which is not supported by the given changes in working capital and cash flows. The AR increase, prepaid decrease, and accrued liability decrease have specific impacts that push expenses up and revenues up only to a limited extent consistent with 51,800, not 96,800.

Option C: $54,200.
This is close to the computed 51,800 but not equal. If one misapplies a change (for example, omitting the 1,700 from the prepaid decrease or miscounting the accrued liabilities adjustment), the result could drift to 54,200. However, the precise combination of revenue and the four expense components shown (20,100 cash expenses, 3,900 depreciation, 1,700 prepaid-use, 1,200 accrued-liability decrease) yields 26,900 in expenses, and with 78,700 in revenue, the correct accrual net income is 51,800, not 54,200.

Option D: $43,400.
This would require even smaller net accrual revenue or substantially larger accrual expenses than the data support. Specifically, it would imply more expansive deductions or less revenue than the given figures permit, contradicting the calculated impact of AR, prepaid, and accrued-liability changes, as well as the depreciation addition. The arithmetic from the provided numbers does not support 43,400.

Summary of reasoning across options:
- The key steps are to compute accrual revenue by adding the AR increase to cash collections, and to compute accrual expenses by summing cash expenses, noncash depreciation, and the effects of changes in prepaid expenses and accrued liabilities as adjustments to current-period expense.
- Only by applying all four adjustments (depreciation +, prepaid-use +1,700, accrued-liability decrease +? effectively increases current expense by 1,200, which in this setup is added as +1,200) yields total accrual expenses of 26,900 and accrual revenue of 78,700, giving 51,800.
- The other options diverge from this precise calculation by misapplying one or more of these adjustments or by miscalculating revenue/expense components.