Preparing an accrual-based statement
Racey has prepared an income statement for the 12-month reporting period ended 30 June on a cash basis, showing a $43 200 profit. The cash-based statement shows the following:
|
Sales
|
$277
|
400
|
|
Inventory purchased
|
164
|
000
|
|
Gross profit
|
113
|
400
|
|
Expenses
|
|
|
|
Salary and wages
|
28
|
400
|
|
Rent
|
9
|
200
|
|
Insurance
|
3
|
440
|
|
Advertising
|
5
|
600
|
|
Administration
|
18
|
800
|
|
Interest
|
4
|
760
|
Additional information
- The accounts receivable and accounts payable balances at the start of the reporting period were $16400 and $9800 respectively. At the end of the reporting period, Racey had accounts receivable of $21 200 and accounts payable of $19760.
- The opening inventory was $32 000 and the closing inventory was $38 000.
- An advertising invoice of $2960 had not been paid.
- The business has equipment that cost $40 400. It has a useful life of five years and an expected salvage value of $4400.
- The insurance expense represents the 12-month premium on a policy that was taken out on 30 April.
Required
a. Prepare an accrual-based income statement for Racey for the period ended 30 June.
b. As a user of financial statements, critique why accrual accounting is preferred to cash accounting to measure financial performance.