In: Accounting
When Sara Yu’s father died suddenly, Sara had just completed the
semester in college, so she stepped in to run the family business,
AAA Couriers, until it could be sold. Under her
father’s direction, the company was a successful operation and
provided ample money to meet the family’s needs.
Sara was majoring in biology in college and knew little about
business or accounting, but she was eager to do a good job of
running the business so it would command a good selling price.
Since all of the services performed were paid in cash, Sara figured
that she would do all right as long as the
Cash account increased. Thus, she was
delighted to watch the cash balance increase from $24,800 at the
beginning of the first month to $63,028 at the end of the second
month—an increase of $38,228 during the two months she had been in
charge. When she was presented an income statement for the two
months by the company’s bookkeeper, she could not understand why it
did not show that amount as income but instead reported only
$21,100 as net income.
Knowing that you are taking an accounting class, Sara brings the
income statement, shown below, to you and asks if you can help her
understand the difference.
AAA COURIERS Income Statement Months of June and July, 2019 |
||||||
Operating Revenues | ||||||
Delivery Fees | $ | 205,018 | ||||
Operating Expenses | ||||||
Salaries and Related Taxes | $ | 128,224 | ||||
Gasoline and Oil | 31,000 | |||||
Repairs Expense | 6,570 | |||||
Supplies Expense | 2,268 | |||||
Insurance Expense | 2,856 | |||||
Depreciation Expense | 13,000 | |||||
Total Operating Expense | 183,918 | |||||
Net Income | $ | 21,100 | ||||
In addition, Sara permits you to examine
the accounting records, which show that the balance of
Salaries Payable was $2,680 at the
beginning of the first month but had increased to $4,240 at the end
of the second month. Most of the balance in the
Insurance Expense account reflects
monthly insurance payments covering only one month each. However,
the Prepaid Insurance account had
decreased $300 during the two months, and all supplies had been
purchased before Sara took over. The balances of the company’s
other asset and liability accounts showed no changes.
Required:
2. Prepare a schedule that accounts for the
difference between the increase in the Cash account balance and the
net income for the two months.
When Sara Yu’s father died suddenly, Sara had just completed the
semester in college, so she stepped in to run the family business,
AAA Couriers, until it could be sold. Under her
father’s direction, the company was a successful operation and
provided ample money to meet the family’s needs.
Sara was majoring in biology in college and knew little about
business or accounting, but she was eager to do a good job of
running the business so it would command a good selling price.
Since all of the services performed were paid in cash, Sara figured
that she would do all right as long as the
Cash account increased. Thus, she was
delighted to watch the cash balance increase from $24,800 at the
beginning of the first month to $63,028 at the end of the second
month—an increase of $38,228 during the two months she had been in
charge. When she was presented an income statement for the two
months by the company’s bookkeeper, she could not understand why it
did not show that amount as income but instead reported only
$21,100 as net income.
Knowing that you are taking an accounting class, Sara brings the
income statement, shown below, to you and asks if you can help her
understand the difference.
AAA COURIERS Income Statement Months of June and July, 2019 |
||||||
Operating Revenues | ||||||
Delivery Fees | $ | 205,018 | ||||
Operating Expenses | ||||||
Salaries and Related Taxes | $ | 128,224 | ||||
Gasoline and Oil | 31,000 | |||||
Repairs Expense | 6,570 | |||||
Supplies Expense | 2,268 | |||||
Insurance Expense | 2,856 | |||||
Depreciation Expense | 13,000 | |||||
Total Operating Expense | 183,918 | |||||
Net Income | $ | 21,100 | ||||
In addition, Sara permits you to examine
the accounting records, which show that the balance of
Salaries Payable was $2,680 at the
beginning of the first month but had increased to $4,240 at the end
of the second month. Most of the balance in the
Insurance Expense account reflects
monthly insurance payments covering only one month each. However,
the Prepaid Insurance account had
decreased $300 during the two months, and all supplies had been
purchased before Sara took over. The balances of the company’s
other asset and liability accounts showed no changes.
Required:
2. Prepare a schedule that accounts for the
difference between the increase in the Cash account balance and the
net income for the two months.
Following will be the schedule accounting for difference between increase in cash account balance and net income for two months :-
Particulars | Amount |
Increase in cash | 38228 |
(-) salaries payable increase (4240-2680) [note 1] | (1560) |
(-) prepaid insurance [note 2] | (300) |
(-) supplies [note 3] | (2268) |
(-) depreciation exp [note 4 ] | (13000) |
Net income | $21100 |
Note :-
1. Salaries payable balance has been increased which shows that salary has not been paid in cash but expenses still incurred this, reduced from Cash balance to arrive at Net income.
2. Prepaid insurance balance has been decreased which shows that insurance has not been paid in cash but their balance decreased due to expiration of that portion of insurance with regard to current period this reduced from Cash balance to arrive at Net income.
3. Supplies were purchased earlier so no cash is paid but since it has been consumed in the business so so shown as exp while calculating net income that is why it has been reduced from Cash balance to arrive at Net income.
4 . Since deprivation is a non Cash expense thus it has been reduced from Cash balance to arrive at Net income.