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	$	186,000		$	236,000
Cash collected from clients		152,000			182,000
Cash disbursements
Salaries paid to employees for services rendered during the year		82,000			92,000
Utilities		26,000			32,000
Purchase of insurance policy		57,600			0

In addition, you learn that the firm incurred utility costs of $31,000 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.

Req 1 and 3 Req 2 -------- Prepare an income statement for each year according to the accrual accounting model. PETE, PETE, AND ROY Income Statements Year 1 Year 2 Revenues Expenses: Salaries Utilities Insurance Net income (loss)

Answer 1

Year 1 Year 2 $(13,600) $58,000 cash flow Net operating Calculation: Year 1 year 2 $152,000 $ 102,000 Cash Less: collections Cash disbursements : xalavies expense Utilities Insurance policay Met operating cash flow $82,000 $90,000 $26,000 $32,000 $57,600 & 0 $(13,600) $58,000 PETE, PETE AND Roy Income statements Year 1 Year 2 Revenues $186,000 $ 236,000 Ереке: Salaries $(82,000) $(92,000) Utilities $(31,000) $27,000) Insurance & (19,200) & (19,200 Net Income (Loss) $53,800 $ 97, sool Calculation: utilities expense: $31,000 of utilities were incurred in year 1 but only $26,000 of utilities were paid in year 1.

payable So $31,000 - $26,000 - $5000 of utilities were carried into year 2. therefore, in year 2 utilities actually incurred: Year 2, utilities & $32,000 - $5,000 Year 2, Utilities = $27,000 Insurance policy & $57,600 з уеащ = $19,200 (3 - Year 2 Receivables $ 34,000 $ 88,000 Year 1 Calculation: mallen. Amount of receivables at the end: Year 1 Year 2 beginning balance of accounts receivable & o $34,000 Add: Amounts billed to client $ 186,000 $236,000 lees: Cash collections $152,000 $182,000 Amounts of accounts receivable to be shown $ 34,000 $88,000 in balance sheet Ending Balance of Accounts receivables of year 1 will be the beginning balance of accounts receivable of year 2