Question

Year 1 Year 2 Amounts billed to clients for services rendered $ 182,000 $ 232,000 Cash collected from clients 154,000 184,000 Cash disbursements Salaries paid to employees for services rendered during the year 84,000 94,000 Utilities 27,000 34,000 Purchase of insurance policy 58,200 0 In addition, you learn that the company incurred utility costs of $32,000 in year 1, that there were no liabilities at the end of year 2, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period.
Required:

1. & 3. Calculate the net operating cash flow for years 1 and 2 and determine the amount of receivables from clients that the company would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model.
2. Prepare an income statement for each year according to the accrual accounting model.

Answer 1

Answer:

Explanation:

Year 1:

Cash collected from clients $154,000

Salaries paid to employees for services rendered during the year $27,000

Utilities $84,000

Purchase of insurance policy $58,200

So, in order to find net cash flow, $(154000-27000-84000-58200)=-15200

Year 2:

Cash collected from clients $184,000

Salaries paid 34000

Utilities paid 94000

Insurance paid is 0

So, net cash flow $184000-$(34000+94000)=$56000

Year1 paid 27000 in salaries, accrued =32000

So still 5000 has to be paid in year 2

Year 2 paid 34000 ⇒ so accrued is 29000

Insurance accrued for each year is 58200/3=19400

Income statement for year 1 and 2

                                         year1   year2

Revenue:  

Income from services 182000 232000

Expense

Salary 84000 94000

Utilities 32000 29000

Insurance 19400 19400

Net income 46600 89600

Answer 2

Answer:

i.  operating income for year 1 = -$15200 and year 2 = $56000

ii. income statement for year 1 =$47000 and year 2 = $89600

Explanation:

operating income shows the financial performance of a business or company. it is the difference between total operating income and total operating expenses. Base on the financial information above, the operating income for year 1 and year 2 can be calculated as:  

                                 OPERATING INCOME FOR YEAR 1 AND YEAR 2

                                                                   year 1                      year 2                                  

                                                                       $                              $

Revenue(cash received from clients      154000                        184000

less operating expenses:

salaries paid                                               84000                         94000

utilities                                                         27000                         34000

purchased insurance policy                      58200                               0      

net operating income                                -15200                           56000  

ii.                               INCOME STATEMENT FOR YEAR 1 AND YEAR 2

                                                                           year 1                   year 2

                                                                                 $                            $                  

Revenue from service                                       182000                  232000

 less total expenses:

salaries                                                               84000                     94000

utilities                                                                 32000                     29000

insurance                                                           19400                     19400  

 net income                                                         46600                   89600  

NOTE: utility cost incurred in year 1 was $32000 but utility actually paid for in year 1 is $27000 which means there is an accrued utility of $5000. in income statement, the 5000 accrued utilities is added to year 1 utilities of 27000 to make up the 32000 and this 5000 accrued utilities is deducted from year 2 utilities of 34000 to arrive the 29000 used in income statements.