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:
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?

a. Net income under Cash Basis is $9,700; while net income unde acrrual basis is $28,170.

b. Accrual basis of accounting provides more useful information for decision-makers.

Explanation:

a. Calculate the first year’s net earnings under the cash basis of accounting, and accrual basis of accounting.

Particular                                    Cash Basis ($)          Accrual Basis ($)

Service revenue                             26,600                         33,800

Operating expenses                      (13,670)                          (5,630)

Insurance expenses                        (3,230)                               0      

Net income                                       9,700                          28,170  

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

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

The reason is that under accounting basis of accounting, revenue is accounted when it is earned and expenses are accounted for only when it is incurred. This makes it porive all the necessary information about actual revenue, expenses and income of an entity for a particular period.

However, under cash basis, revenues are accounted for when cash are received while epenses are reported when cash is paid. This makes it not to provide alll necessary information by under or overstating all necessary information about the operation about an entity in particular a period.