On January 1, 2022, Norma Smith and Grant Wood formed a computer sales and service company in Manchester, U.K., by investing £90,000 cash. The new company, Lakeland Sales and Service, has the following transactions during January.

1. Pays £6,000 in advance for 3 months’ rent of office, showroom, and repair space.

2. Purchases 40 personal computers at a cost of £1,500 each, 6 graphics computers at a cost of £2,500 each, and 25 printers at a cost of £300 each, paying cash upon delivery.

3. Sales, repair, and office employees earn £12,600 in salaries and wages during January, of which £3,000 was still payable at the end of January.

4. Sells 30 personal computers at £2,550 each, 4 graphics computers for £3,600 each, and 15 printers for £500 each; £75,000 is received in cash in January, and £23,400 is sold on a deferred payment basis.

5. Other operating expenses of £8,400 are incurred and paid for during January; £2,000 of incurred expenses are payable at January 31.

Instructions

a. Using the transaction data above, prepare for the month of January (1) a cash-basis income statement, and (2) an accrual-basis income statement.

b. Using the transaction data above, prepare as of January 31, 2022, (1) a cash-basis statement of financial position and (2) an accrual-basis statement of financial position.

c. Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theory underlying the elements of financial statements.