Reference no: EM131976299

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.