Management Consultants, Inc., opened a consulting business on July 1. 1979. Roy Bean and Sarah Bower each contributed \(\$ 5,000\) cash for shares of the firm's common stock. The corporation borrowed \(\$ 6,000\) from a local bank on August 1, 1979. The loan is repayable on July 31, 1980, with interest at the rate of 10 percent per year.

Office space was rented on August 1, with 2 months' rent paid in advance. The remaining monthly rental fees of \(\$ 600\) per month were made on the first of each month beginning October 1. Office equipment with a 3

-year life was purchased for cash on August 1 for \(\$ 3,600\).

Consulting services rendered for clients between August 1 and December 31, 1979, were billed at \(\$ 12,000\). Of this amount, \(\$ 8,000\) was collected by year-end.

Other costs incurred and paid in cash by the end of the year were as follows: utilities, \(\$ 350\); salary of secretary, \(\$ 5,500\); supplies used, \(\$ 250\). Unpaid bills at year-end are as follows: utilities, \(\$ 50\); salary of secretary, \(\$ 800\); supplies used, \(\$ 40\).

a Prepare an income statement for the 5 months ended December 31, 1979, assuming that the corporation uses the accrual basis of accounting, with revenue recognized at the time services are rendered.

b Prepare an income statement for the 5 months ended December 31, 1979, assuming that the corporation uses the cash basis of accounting.

c Which basis of accounting do you feel provides a better indication of operating performance of the consulting firm for the period? Why?