Question

Mary and Jack Gray, local golf stars, opened the Chip-Shot Driving Range Company on March 1, 2008. They invested $25,000 cash and received common stock in exchange for their investment. A caddy shack was constructed for cash at a cost of $8,000, and $800 was spent on golf balls and golf clubs. The Grays leased five acres of land at a cost of $1,000 per month and paid the first month's rent. During the first month, advertising costs totaled $750, of which $150 was unpaid at March 31, and $400 was paid to members of the high-school golf team for retrieving golf balls. All revenues from customers were deposited in the company's bank account. On March 15, Mary and Jack received a dividend of $1,000. A $100 utility bill was received on March 31 but was not paid. On March 31, the balance in the company's bank account was $18,900.Mary and Jack thought they had a pretty good first month of operations. But, their estimates of profitability ranged from a loss of $6,100 to net income of $2,450.InstructionsWith the class divided into groups, answer the following.(a) How could the Grays have concluded that the business operated at a loss of $6,100? Was this a valid basis on which to determine net income?(b) How could the Grays have concluded that the business operated at a net income of $2,450? (Hint: Prepare a balance sheet at March 31.) Was this a valid basis on which to determine net income?(c) Without preparing an income statement, determine the actual net income for March.(d) What was the revenue earned in March?

Answer 1

Answer:

a) they consider income/loss the cash flow of the business rather than revenues and expenses. That is not a correct basis to measure income.

b) Having a cash balance of 27,450 which is not correct.

c and d

revenues                 5,700

expenses per month:

rent               1000

advertizing     750

wages            400

utilities            100

total expenses      (2,250)  

net income             3,450

Explanation:

a)

   ending cash         18,900

   beginning cas   (25,000)  

   cash flow            (  6, 100)

b)

considering how they did the loss stimation they will also consider cash flow and not revenues/expenses

c)

can determinate the cash collected from customer which will be revenues for the month by doing the cash flow:

beginning      25,000

caddy shack  (8,000)

supplies            (800)

rent                 (1,000)

adv                    (600)

wages               (400)

dividends      (1,000)    

before revenue 13,200

revenues                    X  

ending cash      18,900

18,900 - 13,200 = 5,700 revenues

net income for the month:

revenues                 5,700

expenses per month:

rent               1000

advertizing     750

wages            400

utilities            100

total expenses      (2,250)  

net income             3,450