Question

In its first year of operations, Crane Company recognized $31,700 in service revenue, $7,700 of which was on account and stil outstanding at year-end. The remaining $24,000 was received in cash from customers. The company incurred operating expenses of $16,600, of these expenses, $12,690 were paid in cash; $3,910 was stil owed on account at year-end. In addtion, Crane prepaid $3,260 for insurance coverage thet would not be used until the second year of cperations (a) Calcuate the first year's net earnings under the cash basis of accounting, and caleulate the irst years net earnings under the accrual basis of accouriting (b) which basis of accounting (cash or accrual) provides more useful information for decision-makers?

Answer 1

Explanation:

a. The computation of the net earnings under the cash basis of accounting and the accrual basis of accounting are as follows:

Cash basis of accounting

Service revenue    $24,000    ($31,700 - $7,700)

Less:

Operating expenses -$12,690

Prepaid insurance     -$3,260

Net earnings              $8,050

Accrual basis of accounting

Service revenue    $31,700

Less:

Operating expenses -$16,600

Net earnings              $15,100

b. The accrual basis of accounting is more useful as compare to the cash basis of accounting as it recognizes the revenues when it is earned and the expenses when it is incurred