Posted by **Anonymous** on Tuesday, February 12, 2013 at 6:25am.

In its first year of operations Tower Ltd purchased and paid for widgets costing $50,000. During

that year Tower Ltd sold 60 per cent of the widgets. The widgets on hand at the end of the year

cost $20,000. The sales were on credit terms. Tower Ltd received $37,000 in cash from

customers and $3,000 remained uncollected at the end of the year. During the last quarter of the

year of operations Tower Ltd entered into a property insurance contract for losses arising from

fire or theft. The annual premium of $4,000 was paid in cash and the insurance expired nine

months after the end of the reporting period.

Calculate Tower Ltd’s profit for the first year of operations on an accrual basis and on a

cash basis. Explain the difference between the two measures. Which of the two profit

measures is more useful for assessing Tower Ltd’s performance during its first year of

operations? Give reasons for your answer.

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