Problem 3. In its first year of Operations Buddy Company earned $28,000 in service revenue, $6,000 of which was on account and still outstanding at year-end. The remaining $22,000 was received in cash from customers.

The company incurred operating expenses of $14,500. Of these expenses $13,000 were paid in cash; $1,500 was still owed on account at year-end. In addition, Buddy prepaid $3,600 for insurance coverage that would not be used until the second year of Operations.

Instructions

(a) Calculate the first year's net earnings under the cash basis of accounting, and calculate the first year's net earnings under the accrual basis of accounting.

(b) Which basis of accounting (cash or accrual) provides more useful information for decision makers?