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 $ 184,000 $ 234,000 Cash collected from clients 167,000 197,000 Cash disbursements Salaries paid to employees for services rendered during the year 97,000 107,000 Utilities 33,500 47,000 Purchase of insurance policy 62,100 0 In addition, you learn that the firm incurred utility costs of $38,500 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.

Answer 1

1. Computation of Net Operating Cash flow

Particulars Year 1 $ Year 2 $

Net Operating Cash flow

Cash collected from clients $167,000 $197,000

Less: Cash Disbursement

Salaries $97,000 $107,000

Utilities $33,500 $47,000

Purchase of insurance policies $62,100 $0

Net Operating Cash Flow -$25,600 $43,000

Therefore, net operating cash flow for year 1 is -$25,600 and year 2 is $43,000.

2. Income Statement for each year

Particulars Year 1 $ Year 2 $

Revenue $184,000 $234,000

Expenses:

Salaries $97,000 $107,000

Utilities $38,500 $42,000

Insurance Policy($62, 100/3) $20,700 $20,700

Net Income $27,800 $64,300

Working:

Utilities for year 2 = $33,500 + $47,000 - $38,500 = $42,000

3. Computation of account receivables

Particulars Year 1 $ Year 2 $

Account receivables beginning balance $0 $17,000

Add: Account billed to client $184,000 $234,000

Less: Cash collections from clients $167,000 $197,000

Ending account receivables $17,000 $54,000

Therefore, net amount of account receivables for year 1 is $17,000 and year 2 is $54,000