Question

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	$	170,000		$	220,000
Cash collected from clients		160,000			190,000
Cash disbursements
Salaries paid to employees for services rendered during the year		90,000			100,000
Utilities		30,000			40,000
Purchase of insurance policy		60,000			0

In addition, you learn that the company incurred utility costs of $35,000 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

1.

Net operating cash flows

Year 1. = $160,000- $90,000-$30,000-$60,000 = ($20,000)

Year 2 = $190,000-$100,000-$40,000 = $50,000

3.

Amount receivables from company

Year 1 = $170,000-$160,000 = $10,000

Year 2 = $220,000-$190,000+$10,000 = $40,000

2.

Income Statement for each year

Particular	Year 1	Year 2
Revenues	$170,000	$220,000
Expenses:
Salaries	$(90,000)	$(100,000)
Utilities	$(35,000)	$(35,000)
Insurance policy	$(20,000)	$(20,000)
Net income	$25,000	$65,000