Question

During 2018, Waggoner Company performed services for which customers paid or promised to pay $587,000. Of this amount, $552,000 had been collected by the end of 2018. Waggoner paid $340,000 in cash for employee wages and owed the employees $15,000 at the end of the year for work that had been done but had not paid for. Waggoner paid interest expenses of $3,000 and $195,000 for other service expenses. The income tax rate was 35%, and income taxes had not yet been paid at the end of the year. Waggoner declared and paid dividends of $20,000. There were no other events that affected cash.

Please provide answers to the followings:

a. Prepare an income statement for Waggoner for the year (December 31 year-end).

b. Prepare the statement of cash flows for the year (December 31 year-end) and state change in cash.

Answer 1

a.

Waggoner Company Income Statement For year ended December 31, 2018
Revenue
Service Revenue		$587000
Expenses
Wages and Salaries (340000+15000)	355000
Service Expenses	195000
Interest Expenses	3000
Total Expenses		$553000
Income before tax		$34000
Tax expenses (34000*35%)		11900
Net Income after tax		$22100

1) As per Accrual system of accounting revenue is to recognise for the services it is earned as tthe service has been perform whole of the promised amount will be recognised as income whether or not payment has been made for the same and Expemses are to recognised for the services it incurred hence paid expenses and payable both are to be recognise as expense .

2) Dividend expenses are not the expenses but are the laibilty of company towards the shareholders and are not charge to Income statement , but in Balancesheet they are paid out of retained earning hence reduce from retained earnings .

b) Statement of Cashflow

	Statement of Cashflows For the year ended December 31, 2018
Cash flow from operating activities
Cash receipt from services	$552000
Wages and Salaries	$(340000)
Interest Expenses	$(3000)
Other service expenses	$(195000)
Cashflow from Operating Activities		$14000
Casgh flow from financial activitiy
Dividend Paid	$(20000)
Cash flow from Finance Activitiy		$(20000)
Net Cashflow		$(6000)

Cash balance at the end of December , 2018 will decrease by $(6000) as their is net cashoutflow during the the year .

As Interest expenses are the part of Net income from operating Activities , their payment will be shown under cash flow from Operating Activities .