p 3 11 cash and accrual basis on january 1 2012 norma smith and grant wood formed a 264451

P 3 11 (Cash and Accrual Basis)On January 1, 2012, Norma Smith and Grant Wood formed a computer sales and service enterprise in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January.

1.Pays $6,000 in advance for 3 months’ rent of office, showroom, and repair space.

2.Purchases 40 personal computers at a cost of $1,500 each, 6 graphics computers at a cost of $2,500 each, and 25 printers at a cost of $300 each, paying cash upon delivery.

3.Sales, repair, and office employees earn $12,600 in salaries and wages during January, of which $3,000 was still payable at the end of January.

4.Sells 30 personal computers at $2,550 each, 4 graphics computers for $3,600 each, and 15 printers for $500 each; $75,000 is received in cash in January, and $23,400 is sold on a deferred payment basis.

5.Other operating expenses of $8,400 are incurred and paid for during January; $2,000 of incurred expenses are payable at January 31.

Instructions

(a)Using the transaction data above, prepare

(1) a cash basis income statement and

(2) an accrual basis income statement for the month of January.

(b)Using the transaction data above, prepare

(1) a cash basis balance sheet and

(2) an accrual basis balance sheet as of January 31, 2012.

(c)Identify the items in the cash basis financial statements that make cash basis accounting inconsistent with the theory underlying the elements of financial statements.