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

Date Transaction Amount a Cash Receipts Jan. 1 Investment by Praveen Ailawadi for 100 percent of Ailawadi Corporation's Common Stock $ 75,000 Jan. 1 Loan from Upper Valley Bank, due June 30, Year 6, with interest at 6 percent per year 40,000 Jan. 15 Advance from a customer for merchandise scheduled for delivery in February, Year 6 1,200 Jan. 1-31 Sales to customers 60,000 Cash Disbursements Jan. 1 Rental of retail space at a monthly rental of $3,000 (6,000)

Jan. 1 Purchase of display equipment (three-year life, zero salvage value) (36,000)

Jan. 1 Premium on property and liability insurance for coverage from January 1 to December 31, Year 6 (1,200)

Jan. 15 Payment of utility bills (750)

Jan. 16 Payment of salaries (3,500)

Jan. 1-31 Purchase of merchandise (44,800)

Balance, January 31, Year 6 S 83,950 The following information relates to Ailawadi Corporation as of January 31. Year 6:

(1) Customers owe the firm S9.500 from sales made during January.

(2) The firm owes suppliers S3. 900 for merchandise purchased during Januars.

(3) Unpaid utility bills total S260. and unpaid salaries total SI. 260.

(4) Merchandise inventory on hand totals S5.500.

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 sou believe provides a better indication of the operating performance of the firm during January? Why?