Hooper Company prepared the following income statement using the cash basis of accounting:
HOOPER COMPANY
Income Statement, Cash Basis
For the Year Ended December 31, 2013
Service revenue (does not include $40,000 of services rendered on account
because the collection will not be until 2014)...................................................... $380,000
Expenses (does not include $20,000 of expenses on account because
payment will not be made until 2014) ................................................................. 220,000
Net income ............................................................................................................... $160,000
Additional data:
1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above.
2. On January 1, 2013, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above.
Instructions:
(a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change.
(b) Explain which basis (cash or accrual) provides a better measure of income.