Case #4 - Introduction to Accruals

Instructor Notes

This case highlights the accounting problem of providing services to customers and then being paid for those services at a later date. Up until this point, students should only be familiar with revenue transactions where the customer pays on the day of service. This is a great case to introduce before covering accrual accounting. It is good for students to think about and struggle with the problem before introducing accrual accounting as a solution.

Difficulty: Medium

Learning Objectives: 2-1 & 2-2

Implementation: Copy the case and distribute it to the students as they enter class. Before providing any explanation of accrual accounting ask students to read the case and develop an answer individually. Tell them to not only develop an answer but also provide a logical explanation for the answer they develop. After allowing students time to develop their individual answers, put them into groups to reach consensus on an answer. Also, ask each group to select a spokesperson. Allow groups time to develop answers, then call on some of the spokespersons to share their solutions.

Handouts and Solution for Case #4 available on Resources Page

Introduction to Accrual Accounting

Professional Headhunters, Inc. (PHI), is a job placement company that operates in the northeastern United States. During Year 1 the company earned $145,000 in revenue by providing services to customers. However, it collected only $120,000 of the revenue in cash. PHI expected to collect the remaining $25,000 in Year 2. In addition, PHI incurred $80,000 of expenses. However, by the end of Year 1, PHI had paid only $75,000 of the cash owed for expenses because it had not yet paid $5,000 to employees who had worked during Year 1 but had not been paid by the end of the year. PHI expected to pay the $5,000 in cash to the employees during Year 2. Based on this information alone, determine the amount of total assets, total liabilities, net income, and cash flow from operations that PHI should report on its Year 1 financial statements.