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Case Interview Prep

Category - Accounting

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Kimmey’s Cookies sells gourmet dog biscuits. She uses the cash method of accounting. She purchased $5,000 in inventory on account on October 10th. That same day, she sold $2,500 in biscuits on account to the local pet shop. She will be billed for the inventory on October 12th and she expects payment for the sale on October 15th. Her revenue for October 10th is:
  1. $7,500
  2. 0
  3. $2,500
  4. $5,000
  5. $1,000
Explanation
Answer - B - Kimmey will not recognize any revenue on October 10th, as she uses the cash-basis method of accounting. Thus, revenue is recognized when payment is received.

Key Takeaway: Cash-basis accounting recognizes revenue when the money is actually received. Sales made on account will not be recognized until the invoice is paid. This method of accounting is usually used by smaller businesses, normally sole proprietorships.
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