Cash versus accrual basis of accounting. J. Hennessey opens a retail store on January I, Year 8. Hennessey invests $20,000 for all of the common stock of Hennessey Retail Store, Inc. The store borrows $10,000 from a local bank. The loan is repayable on December 31, Year 9, with interest at the rate of 12 percent per year.

The store purchases $84,000 of merchandise on account during Year 8 and pays

$76,000 of the amount by the end of Year 8. A physical inventory taken on December 31, Year 8, indicates $12,000 of merchandise on hand.

During Year 8, the store makes cash sales to customers totaling $30,000 and sales on account totaling $70,000. Of the sales on account, the store collects $56,000 by December 3 1 , Year 8.

The store incurs and pays other costs as follows: salaries, $20,000; utilities,

$1,500. It has unpaid bills at year-end as follows: salaries, $1,400; utilities, $120.

a. Prepare an income statement for Year 8 assuming that the company uses the accrual basis of accounting and recognizes revenue at the time of sale.

b. Prepare an income statement for Year 8 assuming that the company uses the cash basis of accounting.

c. Which basis of accounting do you believe provides a better indication of operating performance for the retail store during Year 8? Why?

d. Prepare a balance sheet on December 31, Year 8.