Question

In its first year of operations, gomes company recognized $28,000 in service revenue, $6,000 of which was on account and still outstanding at year-end. the remaining $22,000 was received in cash from customers. the company incurred operating expenses of $15,800. of these expenses, $12,000 were paid in cash; $3,800 was still owed on account at year-end. in addition, gomes prepaid $2,400 for insurance coverage that would not be used until the second year of operations.

Answer 1

Answer:

The accrual basis provides more useful information for decision makers as it matches better revenue against expenses.

Explanation:

net earnings under the cash basis of accounting:

service revenue $22,000

less operating expenses $13,000

less insurance $3,600

Net earnings $5,400

net earnings under the accrual basis of accounting:

service revenue $28,000

less operating expenses $14,500

Net earnings $13,500

The accrual basis provides more useful information for decision makers as it matches better revenue against expenses.

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