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Jane Lawler has recently started a small business that sells bedroom furnishings. She has hired you as her accountant as she admits that her knowledge of accounting is rather limited. At the end of her first year (30 June 2008), you have prepared the financial statements for her business and sent them to her. Shortly afterwards you receive an email from Jane with the following questions:
1.My Income Statement shows a Net Profit for the year of $150 000. However, during the year my Cash at Bank went from $5 000 on 1 July 2007 to $45 000 on 30 June 2008. This is an increase of $40 000. Shouldn’t the Net Profit for the year be the same as the increase in cash for the year?
2.During the year I purchased some Furniture and Fittings for $56 000. I recently went into the shop where I originally purchased these items and I saw that they are currently selling for $65 000. Shouldn’t the amount on my Balance Sheet be adjusted upwards to reflect this?
3.Also in relation to the Furniture and Fittings there is Accumulated Depreciation of $5 600. What actually is depreciation? Why is there a separate Accumulated Depreciation account? Wouldn’t it be easier to just do the credit directly to the asset account?
4.During June 2008 I paid $20 000 cash for my insurance policy that runs from 1 August 2008 to 31 July 2009. Why has this payment not been recorded as an expense on my Income Statement? How was this payment recorded?
5.On my Income Statement there is a Gross Profit figure and a Net Profit figure. What is the difference between them? Which one is more important? 

Required:
Draft a reply to Jane that answers her questions. Remember that http://www.400190.com/thesis_sample/Australia_Thesis_sample/ she has only limited accounting knowledge. Your answer should not exceed 250 words.
Several points can be highlighted in response to Jane’s questions.
1.Accrual accounting is the basic accounting standard used in computing the net profit. However, cash statement only reveals net changes in bank account. Revenue recognized and expenses paid in a particular fiscal year should be booked in income statement. But in some occasions, a portion of revenues and expenses are not received and paid in cash during the same fiscal year. As a result, the cash statement does not show such amount, which causes a difference between Net Profit for the year and change in cash
2.All assets are recorded at acquisition cost. As office furniture is classified as fixed assets, it should be recorded in the balance sheet as purchase cost instead of current market value. This is the principle of conservatism in accounting.#p#分頁標題#e#
3.Doing the credit directly on asset will cost a problem. According to GAAP, assets have to be recorded at acquisition cost. A separated Accumulated Depreciation account reports the amount of depreciation that has been taken from the time an asset was acquired until the date of the balance sheet. Depreciation is the transfer of a percentage of the asset's cost from the balance sheet to the income statement during each year of the asset's life.
4.The insurance payment cannot be booked as an expense for this financial year because the policy does not cover current financial year. As a result, it should be booked as prepaid insurance expenses ledger on the debit side and bank account on the credit side.
5.Gross profit shows that how much company gained during the period on the sales after reduction of all the direct costs. Net profit subtracts all the indirect expenses such as utilities, administrative expenses from the gross profit.  Net profit shares a higher importance because it shows the net money the business can generate in an accounting year where gross profit only serves as a reference on how much the firm can make after direct costs.

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