Question

Listed below are several transactions that took place during the first two years of operations for the law firm of John, John and Steves. Year 1 Year 2 Amounts billed to customers for services rendered $200,000 $210,000 206,500 Cash collected from customers 193,500 Cash disbursements 75,000 65,000 Salaries paid to employees for services rendered during the year 50,000 30,000 Utilities 48,000 Purchases of insurance policy In addition, you learn that the company incurred utility costs of $40,000 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: Calculate the net operating cash flow for years 1 and 2. 1. Prepare an income statement for each year according to the accrual accounting model. 2. Determine the amount of receivables from customers that the company would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model. 3.

Answer 1

	Calculation of net operating cash flows
			Year -1	Year -2
		Cash collected from customer	$193,500	$206,500
		Less: cash payments
		Salaries	-$65,000	-$75,000
		Utilities	-$30,000	-$50,000
		Insurance	-$48,000
		Net operating cash flows	$50,500	$81,500			Account receivable T account
						Sales yr-1	200000
	Income statement							Cash yr-1	193500
			Year -1	Year -2				ending bal. yr-1	6500
		Revenue	$200,000	$210,000
						Beg. Bal. yr-2	6500
		EXPENSES					210000		$206,500
		Salary	$65,000	$75,000
		Utilities expense	$40,000	$40,000				ending bal. yr -2	$10,000
		Insurance expense	$16,000	$16,000
							Utility expense
		Income	$79,000	$79,000			for year 1 expense is 40,000, paid is 30,000, hence 10,000 is due that was paid in year 2.
							Year 2 payment was made for utitlity amounting to 50,000 for which 10,000 related to year -1
	Account receivable balance		Year-1	Year-2
		Account receivable	$6,500	$10,000