Question

N its first year of operations, pharoah company recognized $31,000 in service revenue, $6,900 of which was on account and still outstanding at year-end. The remaining $24,100 was received in cash from customers.The company incurred operating expenses of $16,900. Of these expenses, $13,770 were paid in cash; $3,130 was still owed on account at year-end. In addition, pharoah prepaid $3,200 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.

Answer 1

1) Income statement (using cash basis)

Revenues (only cash receipts) $24,100

Expenses

expenses paid in cash $13,770

insurance $3,200

total expenses $16,970

Net income $7,130

2) Income statement (using accrual basis)

Revenues (earned) $31,000

Expenses (incurred, insurance for

next year not included) $16,900

Net Income $14,100