J. Thompson opened a hardware store on January 1, 1979. Thompson invested \(\$ 6,000\) and borrowed \(\$ 6,000\) from the local bank. The loan is repayable on June 30, 1979, with interest at the rate of 8 percent per year.

Thompson rented a building on January 1, and paid 2 months' rent in advance in the amount of \(\$ 1,000\). Property and liability insurance coverage for the year ending December 31, 1979, was paid on January 1 in the amount of \(\$ 600\).

Thompson purchased \(\$ 18,000\) of merchandise inventory on account on January 2 and paid \(\$ 6,000\) of this amount on January 25. The cost of merchandise on hand on January 31 was \(\$ 10,000\).

During January, cash sales to customers totaled \(\$ 8,000\) and sales on account totaled \(\$ 4,000\). Of the sales on account, \(\$ 1,000\) were collected as of January 31 .

Other costs incurred and paid in cash during January were as follows: utilities, \(\$ 300\); salaries, \(\$ 550\); taxes, \(\$ 150\).

a Prepare an income statement for January, assuming that Thompson uses the accrual basis of accounting with revenue recognized at the time goods are sold (delivered).

b Prepare an income statement for January, assuming that Thompson uses the cash basis of accounting.

c Which basis of accounting do you feel provides a better indication of the operating performance of the hardware store during January? Why?