Question

The following transactions were carried out during the month of May by Hagen and Associates, a firm of design architects. For each of the five transactions, state whether the transaction represented revenue to the firm during the month of May. Give reasons for your decision in each case. a. The firm received $300,000 cash by issuing additional shares of capital stock. b. Collected cash of $25,000 from an account receivable. The receivable originated in April from services rendered to a client. c. Borrowed $60,000 from Century Bank to be repaid in three months. d. Earned $250 interest on a company savings account during the month of May. No withdrawals were made from this account in May. e. Completed plans for a guesthouse, pool, and spa for a client. The $7,000 fee for this project was billed to the client in May, but will not be collected until June 25.

Answer 1

Hagen and Associates

a. = Cash inflow from financing activity (Common stock). It does not represent revenue since the cash inflow is not earned from operations.

b. = Cash received from customers. The revenue had been accounted for when the services were rendered in April.

c. = Cash inflow from financing activity (Debt). It does not represent revenue since the cash inflow is not earned from operations.

d. = Revenue item. It is earned from an operating activity.

e. = Revenue item, earned from an operating activity.

Step-by-step explanation:

a) Data and Analysis:

a. Cash $300,000 Common Stock $300,000

b. Cash $25,000 Accounts Receivable $25,000

c. Cash $60,000 Notes Payable $60,000

d. Cash $250 Interest Revenue $250

e. Accounts Receivable $7,000 Service Revenue $7,000

b) All revenue must be earned from Hagen's normal business activity. Any cash inflows that are not operating cash flows are either financing or investing activities. These latter two sources of finance are not classified as revenue.