On January 1, 2020, Caroline Lampron and Jenni Meno formed a computer sales and service enterprise in Montreal by investing $90,000 cash. The new company, Razorback Sales and Service, had the following transactions in January:

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

2. Purchased 40 personal computers at a cost of $1,500 each, six graphics computers at a cost of $3,000 each, and 25 printers at a cost of $450 each, paying cash on delivery.

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

4. Sold 30 personal computers for $2,550 each, four graphics computers for $4,500 each, and 15 printers for $750 each. Of the sales amounts, $75,000 was received in cash in January and $30,750 was sold on a deferred payment plan.

5. Other operating expenses of $8,400 were incurred and paid for during January; $2,000 of incurred expenses were 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 statement of financial position and (2) an accrual basis statement of financial position as at January 31, 2020.

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.