Question

ACCOUNTING COLLEGE LEVEL 1 question

Melissa Young had always been encouraged by her accounting professor to apply her accounting skills as much as possible. When her uncle asked her to prepare his accounting records for a company he owns, called Bob's Repairs Ltd., she readily agreed.

The company has two employees who repair and service all computers used by four large companies in the area.

Following are dated August 31, 2018

1.When the corporation was formed on September 1, 2017, common shares were sold to the sole shareholder, Uncle Bob, for $10,000 cash.

2.Uncle Bob added up all of the invoices the company issued to its customers and the total came to $229,400. All of these were issued on credit.

3.The company received $190,000 cash from customers when they paid their invoices.

4.The company rents a small repair shop for $3,500 per month. The shop was rented for the full year and all rent was paid in cash. In addition, the landlord required the company to pay one month's rent in advance.

5.Salaries to employees totalled $120,000 for the year and were paid in cash.

6.Uncle Bob determined from a review of numerous invoices that the office expenses for the year were $36,400. Of these, all were paid except $4,000 that was still owing.

7.In late August, a new customer approached the company and signed a contract for service to be done to its computers starting in October 2018. The customer paid the company $2,000 in advance to secure the service.

8.Uncle Bob estimated that, given the net income earned by the company this year, income tax  

   expense should be $6,200 but this would not have to be paid for another two months.

9.The company declared and paid $1,000 of dividends to shareholders at the end of the year.

a) There were seven transactions that affected cash. Which of these related to operating activities? What was their total effect? What would Uncle Bob think about the operating cash flow? Which cash flows would be considered financing activities? Did the company need these cash flows? (7 points)

b) The company could not borrow any money from a bank to help start operations. Why do you think this happened? (3 points)

Answer 1

Answer

The following are the transactions related to cash which are related to Operating Activities

1. The company received $190,000 cash from customers when they paid their invoices. –

It is recorded as increase in cash because cash has been collected from the customers.

1. .The Company rents a small repair shop for $3,500 per month. The shop was rented for the full year and all rent was paid in cash. In addition, the landlord required the company to pay one month's rent in advance

It is recorded as deduction in cash (3500*12) = 42000 + 3500 = 45500 as the cash has been paid for the rent.

1. . Salaries to employees totaled $120,000 for the year and were paid in cash

It is recorded as deduction in cash as the cash has been paid for the salaries.

1. Uncle Bob determined from a review of numerous invoices that the office expenses for the year were $36,400. Of these, all were paid except $4,000 that still owed.

It is recorded as deduction in cash as the cash of (36400 – 4000) =32400 has only been paid for the Office Expenses.

1. In late August, a new customer approached the company and signed a contract for service to be done to its computers starting in October 2018. The customer paid the company $2,000 in advance to secure the service.

It is recorded as increase in cash because cash has been collected from the customers for the services to be performed in October.

Total Effect

Cash received from customers	190000
Cash received from customers for services to be performed later	2000
Total Cash Received	192000
Less Payments
Cash Paid for Rent	(45500)
Cash Paid for Salaries	(120000)
Cash Paid for Office Expenses	(32400)
Total Payments	(197900)
Net Effect (192000 -197900)	(5900)

Operating Cash flows has comes out to be negative as the payments exceed receipts and Uncle Bob has to make more payments than actually the cash receipts.

Common Shares issued and Payment of dividend is considered as financing activities and the company needs these cash flows because these activities will make cash positive. Due to this activity cash has become positive i.e.

(10000 – 1000) =9000.

b) The company could not borrow any money from a bank to help start operations. Why do you think this happened?

Company could not borrow any money from a bank to help start operations because it thinks it will collect enough money from their customers by rendering the services .Although Company has achieved its mission but it lacks in collecting their receivables which makes their operating activities negative.