Question

In its first year of operations, Sunland Company recognized $30,000 in service revenue, $8,100 of which was on account and still outstanding at year-end. The remaining $21,900 was received in cash from customers. The company incurred operating expenses of $18,600. Of these expenses, $12,880 were paid in cash; $5,720 was still owed on account at year-end. In addition, Sunland prepaid $3,270 for insurance coverage that would not be used until the second year of operations. A) Calculate the first year’s net earnings under the cash basis of accounting, and accrual basis of accounting. Cash Basis Accrual BasisNet Income $ $B) Which basis of accounting (cash or accrual) provides more useful information for decision-makers?

Answer 1

Answer:

A. Cash basis $5,750

Accrual basis $11,400

B. Accrual basis

Explanation:

A. Calculation for the first year’s net earnings under the cash basis of accounting, and accrual basis of accounting

Cash basis Accrual basis

Service revenue

$21,900 $30,000

Less Operating expenses

$12,880 $18,600

Less Insurance expenses $3,270 $0

Net income $5,750 $11,400

B. Based on the above calculation the basis of accounting that provides more useful information for decision-makers is ACCRUAL BASIS OF ACCOUNTING.