Question

In its first year of operations, Sheridan Company recognized $30,000 in service revenue, $7,200 of which was on account and still outstanding at year-end. The remaining $22,800 was received in cash from customers. The company incurred operating expenses of $16,600. Of these expenses, $13,520 were paid in cash; $3,080 was still owed on account at year-end. In addition, Sheridan prepaid $2,650 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. Cash Basis Accrual Basis Net Income (b) Which basis of accounting (cash or accrual) provides more useful information for decision-makers? O

Answer 1

Calculate the net income as follows: А в с Cash Basis Accrual Basis 2 Service revenue | $22.800 $30,000 3 Less: Operating expenses -$13,520 $16,600 4 Less: Insurance expenses -$2,650 5 Net income $6.630 $13,400 SO Accrual basis of accounting provide more useful information for decision-makers.