In its first year of operations, Ramirez Company recognized $30,300 in service r

ID: 2423885 • Letter: I

Question

In its first year of operations, Ramirez Company recognized $30,300 in service revenue, $7,600 of which was on account and still outstanding at year-end. The remaining $22,700 was received in cash from customers.

The company incurred operating expenses of $15,800. Of these expenses, $13,070 were paid in cash; $2,730 was still owed on account at year-end. In addition, Ramirez prepaid $2,810 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 accrual basis of accounting.

(b) Which basis of accounting (cash or accrual) provides more useful information for decision-makers?

Cash Basis Accrual Basis Net Income $ $

Explanation / Answer

A) first year’s net earnings under the cash basis of accounting=

Receipt

cash received form customer = $22,700

Expense

operating expense $13070

insurance expense $ 2810

NET EARNINGS = receipt - expense

=$22,700 - $13070 - $ 2810

= $ 6820

first year’s net earnings under the Accrual basis of accounting=

Income

service revenue = $ 30300

Expense

operating expense = $15800

NET EARNINGS = Income - expense

=$30300 - $15800

= $14500

B) Accrual basis of accounting provides more useful information for decision-makers

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In its first year of operations, Ramirez Company recognized $30,300 in service r

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