Question

In its first year of operations, Sunland Company recognized $33,800 in service revenue, $6,700 of which was on account and still outstanding at year-end. The remaining $27,100 was received in cash from customers. The company incurred operating expenses of $19,600. Of these expenses, $12,640 were paid in cash; $6,960 was still owed on account at year-end. In addition, Sunland prepaid $3,250 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 calculate the first year's net earnings under the accrual basis of accounting. Cash Basis Accrual Basis Net Income $ GA
(b) Which basis of accounting (cash or accrual) provides more useful information for decision-makers? Accrual basis Cash basis Media

Answer 1

A. Cash basis of accounting $11,110

Accrual basis of accounting $13,870

B. Cash basis of accounting

Step-by-step 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 $27,100

Less Expenses ($12,640)

Less Prepaid Assets ($3,250)

Total $11,110

ACCRUAL BASIS OF ACCOUNTING

Revenue $33,800

Less Expenses ($19,600)

Less Prepaid Asset ($3,250)

Total $10,950

Therefore the first year net earnings under the cash basis of accounting is $11,110 and the first year net earnings under the accrual basis of accounting is $10,950

(b) Based on the above Calculation the basis of accounting that provides more useful information for decision-makers will be CASH basis of accounting of the amount of $11,110 because it help to show the complete company financial considerations.