Assume that in July, Tata Motors paid Rs.5 Crores to an external IT consultant for a software project that took 6 months to complete. In July how much would Tata Motors' cash and net income decrease b
1 Answer(s)
Binny
Cash will decrease by 5 crores, because according to the question, Tata has already paid the IT consultant the 5 crores. So that money will come out of the bank account.
However due to accrual / matching accounting not all the 5 crores will be shown as expense in the current month (since it takes 6 months to complete the project). This months expense is 5 crores divided by 6 which is 83.3 lakhs.
Hence if expense increases by 83.3 lakhs then net income will decrease by that much
Sep 23 2013 09:31 AM
However due to accrual / matching accounting not all the 5 crores will be shown as expense in the current month (since it takes 6 months to complete the project). This months expense is 5 crores divided by 6 which is 83.3 lakhs.
Hence if expense increases by 83.3 lakhs then net income will decrease by that much