Question

Anne Marie, the owner of Anne’s Beauty Salon, comes to see you again. She tells you that she just got her year-end set of financial statements from her accountant and is more confused. Here are her questions.
1.    I have very little cash and yet he says that I had a good year with $15,000 net income. He said it was because we use accrual accounting (whatever that means). I know I paid 6 month’s rent ($1,400 a month) in advance at the end of the year. I also paid my insurance for the next year. Insurance cost $6,000. I have several customers who had a lot of services done on credit and haven’t paid yet. I think that totals $11,948 owed to me. Can you explain?
2.    I was paid $200 in advance for some hair coloring I will do in January. He tells me that’s a liability. That doesn’t make any sense to me? Please explain.
3.    In December I did several hair several haircuts during the last week of the year and sent bills to all the customers? When is that counted?

How would you answer these questions?

Answer 1

Answer 1
Rent	Rent paid in advance which result in to decrease in cash but This not recorded at expense (I means not deducted (from revenue) until month is completed.
Insurance cost	Insurance cost paid which would decrease in cash but not recorded in expense
Service revenue	When service performed then service revenue recorded. And cash not received result into increase in net income but does not increase in service revenue.
Answer 2
Purchase of supplies on cash result into decrease in cash but service revenue does not increase Which affect decrease in cash but does not impact on net income.
Answer 3
Sent bill to customer which result in to increase in net income due to increase in revenue but Does not increase in cash.
All above transaction result in to decrease in cash or increased in net income which result in to profitability is higher.
This information provided for practical case problem arises in 1863.
AS per practical case study, some problem arises in Dowlas Iron Company in 1863, this company Having Profit but no cash available to use for investment for expansion. To explain why there is no fund to invest, manager made Show Relation between Net income and cash from operating activities. This statement is today known as cash flow statement under Indirect method.