Question

2. The Larson Company prepared the following income statement using the cash basis of
accounting:

THE LARSON COMPANY
Income Statement, Cash Basis
Year Ended December 31, 2017
Service revenue $460,000
Expenses 220,000
Profit $240,000

Additional data:
1. Service revenue includes $40,000 collected from a customer for whom services
were provided in 2016, and who was billed in 2016.
2. There are an additional $15,000 of expenses that were incurred on account, for
which payment will not be made until 2018.
3. Depreciation on a company automobile for the year amounted to $7,000. This
amount is not included in the expenses above.
4. On December 1, 2017, paid $1,600 for two months' rent (December and January).
This amount is included in the expenses above.

Instructions
a) Prepare Larson's income statement on the accrual basis in conformity with
generally accepted accounting principles. Show calculations and explain each change.
b) Explain which basis (cash or accrual) provides a better measure of profit.

Answer 1