The Larson Company Prepared the Following Income Statement Using the Cash

Essay

The Larson Company prepared the following income statement using the cash basis of accounting:
THE LARSON COMPANY Additional data:
1. Service revenue includes $40,000 collected from a customer for whom services were provided in 2012, and who was billed in 2012.
2. There are an additional $15,000 of expenses that were incurred on account, for which payment will not be made until 2014.
3. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above.
4. On December 1, 2013, paid $1,600 for two months' rent (December and January). This amount is included in the expenses above.
Instructions
a. Prepare Larson's income statement on the accrual basis in conformity with generally accepted accounting principles. Show calculations and explain each change.
b. Explain which basis (cash or accrual) provides a better measure of profit.