Question

In its first year of operations, Cullumber Company recognized $33,700 in service revenue, $6,700 of which was on account and still outstanding at year-end. The remaining $27,000 was received in cash from customers. The company incurred operating expenses of $17,100. Of these expenses, $13,300 were paid in cash; $3,800 was still owed on account at year-end. In addition, Cullumber prepaid $2,730 for insurance coverage that would not be used until the second year of operations.
Required:
a. Calculate the first year’s net earnings under the cash basis of accounting, and the first year’s net earnings under the accrual basis of accounting.
b. Which basis of accounting (cash or accrual) provides more useful information for decision-makers?

Answer 1

Answer:

A. Cash basis of accounting $10,970

Accrual basis of accounting $13,870

B. Accrual basis of accounting

Explanation:

a. Calculation of the first year net earnings under the cash basis of accounting, and the first year net earnings under the accrual basis of accounting.

Cash basis of accounting

Revenue 27,000

Less Expenses -$13,300

Less Prepaid Assets -$2,730

Total $10,970

Accrual basis of accounting

Revenue 33,700

Less Expenses -$17,100

Less Prepaid Asset -$2,730

Total $13,870

(b) Based on the above Calculation the basis of accounting that provides more useful information for decision-makers will be ACCRUAL basis of accounting of the amount of

$13,870 reason been that it help to show the complete company financial considerations.