Chapter 2, Problem 2.18E

Cash versus accrual accounting

• LO2–8

Stanley and Jones Lawn Service Company (S&J) maintains its books on a cash basis. However, the company recently borrowed $100,000 from a local bank and the bank requires S&J to provide annual financial statements prepared on an accrual basis. During 2018, the following cash flows were recorded:

Cash collected from customers		$320,000
Cash paid for:
Salaries	$180,000
Supplies	25,000
Rent	12,000
Insurance	6,000
Miscellaneous	20,000	243,000
Net operating cash flow		$ 77,000

You are able to determine the following information about accounts receivable, prepaid expenses, and accrued liabilities:

	January 1, 2018	December 31, 2018
Accounts receivable	$32,000	$27,000
Prepaid insurance	–0–	2,000
Supplies	1,000	1,500
Accrued liabilities (for miscellaneous expenses)	2,400	3,400

In addition, you learn that the bank loan was dated September 30, 2018, with principal and interest at 6% due in one year. Depreciation on the company’s equipment is $10,000 for the year.

Required:

Prepare an accrual basis income statement for 2018. (Ignore income taxes.)