Dwyer Corporation purchases computer equipment from manufacturers and then sells them in retail stores. The company was founded in early 2016 by Martin Dwyer who had significant experience in the industry and numerous contacts. As a result, the business has achieved strong sales in its first year. During 2016, Martin recorded all cash receipts and cash disbursements. However, Dwyer's banker is requiring an income statement and balance sheet prepared on an accrual basis.
The following is a recap of the cash receipts and disbursements for the year:
Martin, a family friend, has asked for your assistance in preparing financial statements at December 31, 2016 on an accrual basis. The following additional information is available:
1. Customers owed the company $36,000 at year-end for sales. Also, Dwyer's cash collections included $15,000 of amounts collected in advance from other customers for 2017 services.
2. At year-end, $18,000 is owed to suppliers for merchandise purchased on credit.
3. At year-end, merchandise inventory costing $43,000 remained on hand.
4. Salaries owed to employees at year-end totaled $6,200.
5. During 2016, Dwyer paid 9 months of rent for March through November. As of December 31, Dwyer stilled owed December's $1,400 rent payment.
6. The equipment which has a 5-year life and no salvage value, was purchased on January 1, 2016. Straight line depreciation is used.
7. The bank loan requires interest at 8% per year and was issued on June 30, 2016. The principal and interest are to be repaid on July 1, 2017.
8. The insurance payment was for a 3-year policy starting on March 1, 2016.
Based on the above-given information there is an accrual-based income statement for 2016 and a balance sheet as of December 31, 2016:
Prepare an analysis that shows how cash based income is converted to accrual-based net income for 2016