Question

The following events occurred at Jack Company during its first year of business:
a.	To establish the company, the two owners contributed a total of $60,000 in exchange for common stock.
b.	Grooming service revenue for the first year amounted to $175,000, of which $50,000 was on account.
c.	Customers owe $15,000 at the end of the year from the services provided on account.
d.	At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for $15,000 per year and make a $3,000 refundable security deposit. The first year’s lease payment and the security deposit were paid at the beginning of the year.
e.	At the beginning of the year, the company purchased a patent at a cost of $120,000 for a revolutionary system to be used for dog grooming. The patent is expected to be useful for ten years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder.
f.	Operating expenses, including amortization of the patent and rent on the storage building noted in (d) and (e) above, totaled $90,000 for the first year. No expenses were accrued or unpaid at the end of the year.
g.	The company declared and paid a $20,000 cash dividend at the end of the first year. Prepare a Statement of Stockholder's Equity Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is a difference.

Answer 1

• All working forms part of the answer
• Working for ending balance calculation and transaction effects:

Transactions no	Cash	Accounts receivables	Deposits	Patent	Notes Payable	Common Stock	Retained earnings
a.	$            60,000.00					$          60,000.00
b.	$        1,25,000.00	$           50,000.00					$       1,75,000.00
c.	$            35,000.00	$        (35,000.00)
d.	$         (18,000.00)		$                       3,000.00				$        (15,000.00)
e.	$         (24,000.00)			$        1,20,000.00	$                 96,000.00
e ( Amortisation)				$          (12,000.00)			$        (12,000.00)
f.	$         (63,000.00)						$        (63,000.00)
g.	$         (20,000.00)						$        (20,000.00)
Ending Balances	$            95,000.00	$           15,000.00	$                       3,000.00	$        1,08,000.00	$                 96,000.00	$          60,000.00	$          65,000.00

• Income Statement for Net Income calculation

b.	Service revenue	$                   1,75,000.00
	Expenses:
d.	Rent Expenses	$                      15,000.00
e.	Amortisation expense	$                      12,000.00
f.	Other operating expenses	$                     63,000.00
	Total Operating expenses	$                      90,000.00
	Net Income	$                      85,000.00

• Requirement 1: Statement of Stockholder’s Equity

	Common Stock	Retained Earnings	Total
Beginning Balance	$                          -	$                                    -	$                           -
Stock issued	$           60,000.00	$                                    -	$            60,000.00
Net Income	$                          -	$                     85,000.00	$            85,000.00
Dividends paid	$                          -	$                  (20,000.00)	$          (20,000.00)
Ending Balance	$           60,000.00	$                     65,000.00	$        1,25,000.00

• Requirement 2

Working

Cash Flow Statement

	Cash Flows from Operating activities
b.	Cash collected for revenue	$       1,25,000.00
c.	Cash collected from clients	$          35,000.00
d.	Cash paid for rent expenses	$        (15,000.00)
f.	Cash paid for operating expenses	$        (63,000.00)
	Net Cash Flows from Operating Activities		$          82,000.00
	Cash Flows from Investing activities
d.	Cash paid for deposits	$          (3,000.00)
e.	Cash paid for patents	$        (24,000.00)
	Net Cash flows from Investing activities		$        (27,000.00)
	Cash Flows from financing activities
a.	Cash received from common stock issue	$          60,000.00
g.	Dividends paid	$        (20,000.00)
	Net Cash flow from financing activities		$          40,000.00
	Net Increase (Decrease) in Cash		$          95,000.00
	Cash at beginning		$                          -
	Cash at end		$          95,000.00

Net Cash flow from operating activities = $ 82,000
Net Income = $ 85,000

Hence, there is a difference between Cash flow from operating and Net Income.

The company generates LESS Cash flows from operations ($ 82,000) than it earned in Net income ($ 85,000). This is because of the accrual concept of accounting and the fact that cash from operations

The difference is due to:

---Revenue actually earned = $ 175,000, but revenue realized in cash = $ 125,000 + $ 35,000 = $ 160,000. Hence, the difference of $ 15,000 where Net Income is MORE than cash flows.

---Amortisation expense is a NON cash items and will not shown in Cash flows, but deducted while calculating Net Income. Hence difference of $ 12,000 where Net Income is LESS than cash flows.