Explain the difference between cash accounting and accrual accounting.

3.2 a. What are generally accepted accounting principles (GAAP)?

b. What is the purpose of GAAP?

c. What organizations are involved in establishing GAAP?

3.3 Briefly describe the following concepts as they apply to the preparation of financial statements:

a. Accounting entity

b. Going concern

c. Accounting period

d. Monetary unit

e. Historical cost

f. Revenue recognition

g. Expense matching

h. Full disclosure

i. Materiality

j. Cost–benefit

3.4 Explain the difference between cash accounting and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.

3.5 Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2015. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $1.5 million. All revenues were collected in cash during the year, and all expenses other than depreciation were paid in cash.

a. Construct Brandywine’s 2015 income statement.

b. What were Brandywine’s net income, total profit margin, and cash flow?

c. Now, suppose the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expense doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow?