The firm renders consulting services for clients between August 1 and December 31, Year 2, totaling $45,000. It collects $39,000 of this amount by year-end.
It incurs and pays other costs by the end of the year as follows: utilities, $350;
salaries, $28,200; supplies, $650. It has unpaid bills at year-end as follows; utilities, $50; salaries, $1,800; supplies, $40. The firm used all the supplies it had acquired.

a. Prepare an income statement for the five months ended December 31, Year 2, assuming that the coiporation uses the accrual basis of accounting and recognizes revenue at the time services are rendered.

b. Prepare an income statement for the five months ended December 31. Year 2. assuming that the corporation uses the cash basis of accounting.

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