In its first year of operations, Athabasca Corp. earned $52,000 in service revenue. Of that amount, $8,000 was on account and the remainder, $44,000, was collected in cash from customers.

The company incurred various expenses totalling $31,000, of which $27,500 was paid in cash. At year end, $3,500 was still owing on account. In addition, Athabasca prepaid $2,000 for insurance coverage that covered the last half of the first year and the first half of the second year. Athabasca expects to owe $3,000 of income tax when it files its corporate income tax return after year end.

Instructions

(a) Calculate the first year's profit under the accrual basis of accounting.

(b) Calculate the first year's profit under the cash basis of accounting.

(c) Which basis of accounting (accrual or cash) gives the most useful information for decision makers? Explain.