In its first year of operations, Sheridan Company recognized $33,800 in service revenue, $7,200 of which was on account and still outstanding at year-end. The remaining $26,600 was received in cash from customers. The company incurred operating expenses of $19,300. Of these expenses, $13,670 were paid in cash; $5,630 was still owed on account at year-end. In addition, Sheridan prepaid $3,230 for insurance coverage that would not be used until the second year of operations.

Required:

1. Calculate the first year's net earnings under the cash basis of accounting, and the first year's set earnings under the accrual basis of accounting.

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

B. The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when the performance obligation is satisfied and expenses when incurred.

Explanation:

Sheridan Company

A.

Cash Basis

Service Revenue $26,600

Less: Operating Expense 13,670

Insurance Expense 3,230

Net Income $9,700

Accrual Basis

Service Revenue $33,800

Less: Operating Expense 19,300

Insurance Expense 0

Net Income $14,500

B. The accrual basis of accounting provides more useful information for decision makers because it recognizes revenues when the performance obligation is satisfied and expenses when incurred.