Question

In its first year of operations, Blossom Company recognized $31,700 in service revenue, $6,700 of which was on account and still outstanding at year-end. The remaining $25,000 was received in cash from customers. The company incurred operating expenses of $16,400. Of these expenses, $12,220 were paid in cash; $4,180 was still owed on account at year-end. In addition, Blossom prepaid $2,390 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 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

(A) 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 is $10,390 and $15,300 respectively

(B) Accrual basis of accounting

Step-by-step explanation:

The computation is shown below:

(A) Net earning under the cash basis of accounting:

= Cash received from customers - operating expenses paid in cash - insurance coverage

= $25,000 - $12,220 - $2,390

= $10,390

Net earning under the accrual basis of accounting:

= Service revenue - Operating expenses

= $31,700 - $16,400

= $15,300

(B) As we see that the net earning would be more on accrual basis than on a cash basis. To determine the accurate profit for the business organization, the accrual basis should be more useful as it records all expenses, losses, income, and gains for the particular year whether it received in cash or not.

The cash basis records all types of cash expenses, losses, income, and gains which do not give an accurate profit.

So, the accrual provides more useful information for decision-makers