Cash versus accrual basis of accounting. Ailawadi Corporation began operations on January 1, Year 6. The firm's cash account revealed the following transactions for the month of January.

The following information relates to Ailawadi Corporation as of January 31, Year 6:
(1) Customers owe the firm \(\$ 9,500\) from sales made during January.
(2) The firm owes suppliers \(\$ 3,900\) for merchandise purchased during January.
(3) Unpaid utility bills total \(\$ 260\), and unpaid salaries total \(\$ 1,260\).
(4) Merchandise inventory on hand totals \(\$ 5,500\).

a. Prepare an income statement for January, assuming that Ailawadi Corporation uses the accrual basis of accounting and recognizes revenue at the time it sells goods to customers.

b. Prepare an income statement for January, assuming that Ailawadi Corporation uses a cash basis of accounting.

c. Which basis of accounting do you believe provides a better indication of the operating performance of the firm during January? Why?

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Investment by Praveen Ailawadi for 100 percent of Ailawadi Corporation's Common Stock .... Date Transaction Cash Receipts Jan. 1 Jan. 1 Jan. 15 Jan. 1-31 Sales to customers. Loan from Upper Valley Bank, due June 30, Year 6, with interest at 6 percent per year... Advance from a customer for merchandise scheduled for delivery in February, Year 6 ... Amount $75,000 40,000 1,200 60,000 (continued)