Cash (Period 1)Revenue – 3,094COGS – 257.03 Gross Margin – 2838.37Cost of the Inventory = 450 Management – 1075Staff – 822.38Promotion – 2800Rent – 2000Net Income – (3860.01)

Accrual (Period 1)Revenue – 3,094COGS – 257.03 Gross Margin – 2838.37Cost of the Inventory = 450/5000 * 1030= 92.7Cost of Furniture + Coffee Maker = 10,000/14= 714 Management – 1075Staff – 822.38Promotion – 2800Rent – 2000Net Income – (3860.01)

The fixed cost, such as the spending on purchasing furniture and inventory, were partially missing in the cash counting. The cash counting in period 1 or 2, wouldn’t account for the purchase of furniture, while the cash counting would put the entire cost of the inventory in the period we bought it in

I believe that accrual accounting functions better. The costs are evened out over time. For example, now the cost of inventory is distributed to represent the actual cost of the cups sold, and the cost of the original furniture and coffee maker has been spread over 14 periods, so the expense is accurately represented in all of the periods that the machine is being used in. This makes sense because it follows the depreciation idea, where the value of the item isn’t lost all at once, but rather over time. And, in the same story, the cost of the good isn’t hitting the company all at once, but rather, over time.