A company has provided you with the following information about January's income. If the company uses a cash basis of accounting, what is their net income for the month of January?

• A. \$600
• B. \$1,000
• C. \$1,400
• D. \$1,600
• E. None of the above

Answer: (D)

Verified step by step guidance

1. Identify the cash inflows for January. Under the cash basis of accounting, only cash transactions are considered. From the table, the cash inflows are 'Cash Sales' of \$2,800 and 'Cash Received from Customers' of \$1,200.
2. Calculate the total cash inflows by adding the cash sales and cash received from customers: \$2,800 + \$1,200.
3. Identify the cash outflows for January. The cash outflows include 'Cash Paid to Employees for work performed in January' of \$1,600.
4. Calculate the net cash flow by subtracting the total cash outflows from the total cash inflows. This will give you the net income under the cash basis of accounting.
5. Remember that under the cash basis of accounting, non-cash transactions such as credit sales, invoices received from suppliers, unpaid invoices, and unpaid wages are not considered in the calculation of net income.