Question Completion:
Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy.
Year 1 Year 2
Amounts billed to clients for services rendered $184,000 $234,000
Cash collected from clients 153,000 183,000
Cash disbursements:
Salaries paid to employees during the year 83,000 93,000
Utilities 26,500 33,000
Purchase of insurance policy 57,900 0
In addition, you learn that the company incurred Utility costs of $31,500 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.
Answer:
1. Net operating cash flow for
Year 1 Year 2
Cash collected from clients 153,000 183,000
Cash disbursements:
Salaries paid to employees during the year (83,000) (93,000)
Utilities (26,500) (33,000)
Purchase of insurance policy (57,900) 0
Net operating cash flow ($14,400) $57,000
1b. Amount of receivables from clients that the firm would show in its year 1 and year 2 balance sheets:
Year 1 = $31,000
Year 2 = $82,000
2. Income Statement for the years ended December 31, Year 1 and Year 2:
Year 1 Year 2
Service Revenue $184,000 $234,000
Expenses:
Salaries 83,000 93,000
Utilities 31,500 28,000
Insurance expense 19,300 19,300
Total expenses 133,800 140,300
Net income before tax $50,200 $93,700
Explanation:
Calculations:
Accounts Receivables:
Year 1
Bill to clients $184,000
Cash collected 153,000
Balance $31,000
Year 2
Balance $31,000
Bill to clients $234,000
Cash collected 183,000
Balance $82,000
Insurance Expenses for each year = $57,900/3 = $19,300
Utilities Incurred:
Year 1 = $31,500
Paid 26,500
Payable 5,000
Year 2
Paid 33,000
less Yr, 1 5,000
Incurred $28,000
