E 4-1WK 5 On December 31, 2006, Matt Morgan completed the first year of operations for his new computer retail store. The following data were obtained from the company’s accounting records

E 4-1WK 5 On December 31, 2006, Matt Morgan completed the first year of operations for his new computer retail store. The following data were obtained from the company’s accounting records

E 4-1 W5 Matt Morgan  Reporting Income: Cash versus Accrual Accounting

On December 31, 2006, Matt Morgan completed the first year of operations for his new computer retail store. The following data were obtained from the company’s accounting records:

Sales to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               $197,000

Collections from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   145,000

Interest earned and received on savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . .    2,500

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               98,500

Amounts paid to suppliers for inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             103,000

Wages owed to employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3,500

Wages paid to employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                40,000

Utility bill owed: to be paid next month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,100

Interest due at 12/31 on loan to be paid in March of next year . . . . . . . . . . . . . . . . . 1,200

Amount paid for one and one-half years’ rent, beginning Jan. 1, 2006 . . . . . . . . . . .             17,500

Income taxes owed at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               4,000

1. How much net income (loss) should Matt report for the year ended December 31, 2006, according to (a) cash-basis accounting and (b) accrual-basis accounting?

2. Which basis of accounting provides the better measure of operating results for Matt?

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