You have currently been hired by Davis & Company, small public accounting firm. One firm's partners, Alice Davis, has inquired you to deal with the disgruntled client, Mr. Sean Pitt, owner of city's largest hardware store. Mr. Pitt is applying to local bank for substantial loan to remodel store. Bank needs accrual based financial statements but Mr. Pitt has always kept company's records on the cash basis. He doesn't see purpose of accrual based statements. His most current outburst went something like this: "After all, I gather cash from customers, pay bills in cash, and I am going to pay bank loan with cash. And, I already demonstrate my building and equipment as assets and depreciate them. I simply do not understand problem."
Draft the memo to client to describe significance of accrual based financial statements, ensure you: describe difference between the cash basis and accrual basis measure of performance, explain why, in many cases, accrual basis net income give the better measure of performance than net operating cash flow, and describe objective of adjusting entries as they associate to difference between cash and accrual accounting.