Question

2-6. Effect of accruals on the financial statements

Cordell Inc. experienced the following events in 2018, its first year of operation:

1. Received $40,000 cash from the issue of common stock.

2. Performed services on account for $82,000.

3. Paid a $6,000 cash dividend to the stockholders.

4. Collected $76,000 of the accounts receivable.

5. Paid $53,000 cash for other operating expenses.

6. Performed services for $19,000 cash.

7. Recognized $3,500 of accrued utilities expense at the end of the year.

Required

a. Identify the events that result in revenue or expense recognition.

b. Based on your response to Requirement a, determine the amount of net income reported on the 2018 income statement.

c. Identify the events that affect the statement of cash flows.

d. Based on your response to Requirement c, determine the amount of cash flow from operating activities reported on the 2018 statement of cash flows.

e. What is the before- and after-closing balance in the Service Revenue account? What other accounts would be closed at the end of the accounting cycle?

f. What is the balance of the Retained Earnings account that appears on the 2018 balance sheet?

2-7. Net income versus changes in cash

In 2018, Lee Inc. billed its customers $62,000 for services performed. The company collected $51,000 of the amount billed. Lee incurred $39,000 of other operating expenses on account. Lee paid $31,000 of the accounts payable. Lee acquired $40,000 cash from the issue of common stock. The company invested $21,000 cash in the purchase of land.

Required

(Hint: Identify the six events described in the paragraph and record them in general ledger accounts under an accounting equation before attempting to answer the questions.) Use the preceding information to answer the following questions:

a. What amount of revenue will Lee report on the 2018 income statement?

b. What amount of cash flow from revenue will be reported on the statement of cash flows?

c. What is the net income for the period?

d. What is the net cash flow from operating activities for the period?

e. Why is the amount of net income different from the net cash flow from operating activities for the period?

f. What is the amount of net cash flow from investing activities?

g. What is the amount of net cash flow from financing activities?

h. What amounts of total assets, liabilities, and equity will be reported on the year-end balance sheet?

2-8. Supplies and the financial statements model

Pizza Express Inc. began the 2018 accounting period with $2,500 cash, $1,400 of common stock, and $1,100 of retained earnings. Pizza Express was affected by the following accounting events during 2018:

1. Purchased $3,600 of supplies on account.

2. Earned and collected $12,300 of cash revenue.

3. Paid $2,700 cash on accounts payable.

4. Adjusted the records to reflect the use of supplies. A physical count indicated that $250 of supplies was still on hand on December 31, 2018.

Required

a. Show the effects of the events on the financial statements using a horizontal statements model like the following one. In the Cash Flows column, use OA to designate operating activity, IA

for investing activity, FA for financing activity, and NC for net

change in cash. Use NA to indicate accounts not affected by the event. The beginning balances are entered in the following example:

b. Explain the difference between the amount of net income and amount of net cash flow from operating activities.

2-9. Supplies on financial statements

Yard Professionals Inc. experienced the following events in 2018, its first year of operation:

1. Performed services for $35,000 cash.

2. Purchased $6,000 of supplies on account.

3. A physical count on December 31, 2018, found that there was

$1,800 of supplies on hand.

Required

Based on this information alone:

a. Record the events under an accounting equation.

b. Prepare an income statement, balance sheet, and statement of cash flows for the 2018 accounting period.

c. What is the balance in the Supplies account as of January 1, 2019?

d. What is the balance in the Supplies Expense account as of January 1, 2019?

2-22. Closing the accounts

The following information was drawn from the accounting records of Wyckoff Company as of December 31, 2018, before the temporary accounts had been closed. The Cash balance was

$3,600, and Notes Payable amounted to $4,000. The company had revenues of $7,500 and expenses of $3,400. The company’s Land account had a $8,000 balance. Dividends amounted to

$1,000. The balance of the Common Stock account was $2,000.

Required

a. Identify which accounts would be classified as permanent and which accounts would be classified as temporary.

b. Assuming that Wyckoff’s beginning balance (as of January 1, 2018) in the Retained Earnings account was $2,500, determine its balance after the temporary accounts were closed at the end

of 2018.

c. What amount of net income would Wyckoff Company report on its 2018 income statement?

d. Explain why the amount of net income differs from the amount of the ending Retained Earnings balance.

e. What are the balances in the revenue, expense, and dividend

accounts on January 1, 2019

2-25. Classifying events on the statement of cash flows

The following transactions pertain to the operations of Ewing Company for 2018:

1. Acquired $30,000 cash from the issue of common stock.

2. Provided $65,000 of services on account.

3. Paid $22,000 cash on accounts payable.

4. Performed services for $8,000 cash.

5. Collected $51,000 cash from accounts receivable.

6. Incurred $37,000 of operating expenses on account.

7. Paid $6,500 cash for one year’s rent in advance.

8. Paid a $4,000 cash dividend to the stockholders.

9. Paid $1,200 cash for supplies to be used in the future.

10. Recognized $3,100 of accrued salaries expense.

Required

a. Classify the cash flows from these transactions as operating activities (OA), investing activities (IA), or financing activities (FA). Use NA for transactions that do not affect the statement of

cash flows.

b.         Prepare a statement of cash flows. (There is no beginning cash balance.)

Use an example to explain the matching concept.

Answer 1

Note: The minimum requirement for answers here is to answer only 4 subparts in total, which would mean that only subparts a to e of question 2-6 alone need to be answered. However, I will try to answer almost all of the question briefly.

2-6. a:

1. Received $40,000 cash from the issue of common stock. No revenue or expense recognition

2. Performed services on account for $82,000. Revenue Recognition

3. Paid a $6,000 cash dividend to the stockholders. No revenue or expense recognition

4. Collected $76,000 of the accounts receivable. No revenue or expense recognition

5. Paid $53,000 cash for other operating expenses. Expense Recognition

6. Performed services for $19,000 cash. Revenue Recognition

7. Recognized $3,500 of accrued utilities expense at the end of the year. Expense Recognition

2-6. b:

Net income = Total Revenue - Total Expenses = [$82,000 + $19,000] - [$53,000 + $3500] = $44,500

2-6. c:

1. Received $40,000 cash from the issue of common stock. Cash Flow affected

2. Performed services on account for $82,000. Cash Flow NOT affected

3. Paid a $6,000 cash dividend to the stockholders. Cash Flow affected

4. Collected $76,000 of the accounts receivable. Cash Flow affected

5. Paid $53,000 cash for other operating expenses. Cash Flow affected

6. Performed services for $19,000 cash. Cash Flow affected

7. Recognized $3,500 of accrued utilities expense at the end of the year. Cash Flow NOT affected

2-6. d:

Cash flows from operating activities: $76,000+$19,000-$53,000 = $4,000

2-6. e:

Service Revenue A/c before closing: $101,000

Service Revenue A/c after closing = $0

Other accounts closed: Operating Expenses Account, Utilities Expense Account.

2-6. f:

Balance of retained earnings: Profit - Dividends = $44,500 - $6,000 = $38,500

======================================

2-7. a:

Net revenue = $ 62,000

2-7. b:

Cash flows from revenue = $ 51,000

2-7. c:

Net income = $ 62,000 - $ 39,000 = $23,000

2-7. d:

Net cash flows from operating activities: $ 51,000 - $31,000 = $20,000

2-7. e:

The amount of net income is different from the amount of net cash flows from operating activities because the net income is based on accrual system where even the revenues and expenses accrued (or, made on credit/account) are also considered.

2-7. f:

Net cash flows from investing activities: ($21,000); that is, negative $21,000, that is, it is a net cash outflow of $21,000 on purchase of land.

2-7. g:

Net cash flows from financing activities: $40,000

2-7. h:

Total Assets: Land + Receivables + Cash = $21,000 + $11,000 + $39,000 = $71,000

Liabilities: Payables = $8,000

Equity: Common stock + Retained earnings = $40,000 + $23,000 = $63,000

=====================================

2-8. a: Cannot be answered because it says it is to be done as per some example given in your material as indicated by the words "Show the effects of the events on the financial statements using a horizontal statements model like the following one" and "The beginning balances are entered in the following example:"

2-8. b:

The amount of net income is different from the amount of net cash flows from operating activities because the net income is based on accrual system where even the revenues and expenses accrued (or, made on credit/account) are also considered.

2-9. a: For this one, your study material may have a format that could be unique to your country or style or accounting methods. Therefore I will give a brief classification which you will have to understand and then do as required.

1. Performed services for $3,500 cash: Asset ~ Cash; Shareholders' Equity ~ Retained Earnings (Service revenue)

2. Purchased $6000 supplies on account: Liabilities ~ Accounts Payable; Shareholders' Equity ~ Retained Earnings (Purchases)

2-9. c:

Balance in supplies account on 1-1-2019: $1,800

Balance in supplies expense account on 1-1-2019: $0

============================================

2-22. a:

Temporary accounts: Revenues, Expenses

Permanent accounts: Notes Payable, Cash, Land, Common Stock, Retained Earnings.

2-22. b:

Balance in retained earnings: $6,600

2-22. c:

Net income: $4,100

2-22. d:

Amount of net income differs from the balance in retained earnings because the latter includes the accumulated net income of earlier years amounting to $2,500 while the former only includes current year.

2-22. e:

Balance in revenue on 1-1-2019: 0

Balance in expenses on 1-1-2019: 0

=========================================

2-25. a:

1. Acquired $30,000 cash from the issue of common stock. FA

2. Provided $65,000 of services on account. NA

3. Paid $22,000 cash on accounts payable. OA

4. Performed services for $8,000 cash. OA

5. Collected $51,000 cash from accounts receivable. OA

6. Incurred $37,000 of operating expenses on account. NA

7. Paid $6,500 cash for one year’s rent in advance. OA

8. Paid a $4,000 cash dividend to the stockholders. OA

9. Paid $1,200 cash for supplies to be used in the future. OA

10. Recognized $3,100 of accrued salaries expense. NA

2-25. b. Statement of Cash Flows. It can be done in Direct or Indirect Method. I will follow just one. Only change will be in Cash flow from operating activities, between direct and indirect one - that too, obviously only in the way it is done, and not in the final amount.

Cash Flows from Operating Activities:

Cash receipts from customers (51000+8000): 59000

Cash paid to suppliers and employees (22000+6500+1200): (29700)

Cash generated from operations: 29300

Dividend paid: (4000)

Net cash from operating activities 25300

Cash Flows from Investing Activities:

-

Cash Flows from Financing Activities:

Issue of common stock: 40000

Net cash from financing activities: 40000

Net increase in cash and cash equivalents (25300+40000):   65300

Cash and cash equivalents at the beginning 0

Cash and cash equivalents at the end 65300