Question

Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy.

Year 1 Year 2
Amounts billed to clients for services rendered $ 170,000 $ 220,000
Cash collected from clients 160,000 190,000
Cash disbursements
Salaries paid to employees for services rendered during the year 90,000 100,000
Utilities 30,000 40,000
Purchase of insurance policy 60,000 0
In addition, you learn that the firm incurred utility costs of $35,000 in year 1, that there were no liabilities at the end of year 2, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period.
Required:
1. & 3. Calculate the net operating cash flow for years 1 and 2 and determine the amount of receivables from clients that the firm would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model.
2. Prepare an income statement for each year according to the accrual accounting model.
Revenues not attempted not attempted
Expenses:
Salaries 90,000selected answer correct 100,000selected answer correct
Utilities 30,000selected answer incorrect 40,000selected answer incorrect
Insurance 60,000selected answer incorrect 0selected answer incorrect
Net income (loss)

Answer 1

Pete, Pete, and Roy

1. Net operating cash flow for years 1 and 2

Year 1 Year 2

Cash collected from clients $160,000 190,000

Cash disbursements

Salaries paid to employees 90,000 100,000

Utilities 30,000 40,000

Purchase of insurance policy 60,000 0

Total disbursements $180,000 $140,000

Net operating cash flow ($20,000) $50,000

3. Amount of receivables in year 1 and 2:

Year 1 Year 2

Beginning balance $10,000

Amounts billed to clients for

services rendered $ 170,000 $ 220,000

Cash collected from clients 160,000 190,000

Balance $10,000 $40,000

2. Pete, Pete, and Roy

Income Statements for years 1 and 2:

Year 1 Year 2

Service Revenue $ 170,000 $ 220,000

Expenses:

Salaries expense 90,000 100,000

Utilities expense 35,000 35,000

Insurance expense 20,000 20,000

Total expenses $145,000 $155,000

Net income $25,000 $65,000

Step-by-step explanation:

a) Data and Calculations:

Year 1 Year 2

Amounts billed to clients for

services rendered $ 170,000 $ 220,000

Cash collected from clients 160,000 190,000

Cash disbursements

Salaries paid to employees 90,000 100,000

Utilities 30,000 40,000

Purchase of insurance policy 60,000 0

Utility costs incurred in year 1 = $35,000

Net operating cash flow for years 1 and 2

Year 1 Year 2

Cash collected from clients $160,000 190,000

Cash disbursements

Salaries paid to employees 90,000 100,000

Utilities 30,000 40,000

Purchase of insurance policy 60,000 0

Total disbursements $180,000 $140,000

Net operating cash flow ($20,000) $50,000

Insurance expense per year = $60,000/3 = $20,000

Utilities for year 1 = $35,000

Utilities for year 2 = $35,000