Todd Operates a Business Using the Cash Basis of Accounting

question 7

Multiple Choice

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is the Todd's §481 adjustment for this year?

• A) increase income by $420,000
• B) increase income by $16,000
• C) increase expenses by $64,000
• D) increase expenses by $420,000
• E) Todd has no §481 adjustment this year.

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Definitions:

Fixed Cost

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance premiums.

Variable Cost

Costs that vary directly with the level of production or sales volume.

Net Present Value

A method used in finance to calculate the value of a series of future cash flows by converting them into one lump sum present value.

Net 30 Credit Policy

A Net 30 credit policy is a payment term that allows customers to pay the full invoice amount within 30 days after the invoice date.