Selma operates a contractor’s supply store. She maintains her books using the cash method. Selma wants to know whether the accrual basis of accounting would be preferable for her business.

At the end of the year, Selma’s accountant computes her accrual basis income that is used on her tax return. For 2017, Selma reported cash receipts of $1.4 million, which included $200,000 collected on accounts receivable from 2016 sales. It also included the proceeds of a $100,000 bank loan. At the end of 2017, she held $250,000 in accounts receivable from customers, all from 2017 sales.

a. Compute Selma’s accrual basis gross receipts for 2017.

b. Selma paid cash for all of the purchases. The total amount paid for merchandise in 2017 was $1.3 million. At the end of 2016, she had merchandise on hand with a cost of $150,000. At the end of 2017, the cost of merchandise on hand was $300,000. Compute Selma’s gross income from merchandise sales for 2017?



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