Question

In: Accounting

When Sara Yu’s father died suddenly, Sara had just completed the semester in college, so she...

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.

Solutions

Expert Solution

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.


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