Question

In 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. 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 e Textbook and Media Which basis of accounting (cash or accrual) provides more useful information for decision-makers?

Answer 1

(a)
	Cash basis	Accrual basis
Revenue recognized	$ 24,100	$ 31,000
Less: Operating Expenses	($ 13,770)	($ 16,900)
Less: Prepaid Expenses	($ 3,200)	-
Net Income	$ 7,130	$ 14,100
(b)
Accrual basis of accounting provides more useful information for Decision makers