Question

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E2-6 Cordell Inc. experienced the following events in 2018. its first year of operation 1. Received $40.000 cash from the issue of common stock 2. Performed services on account for $82.000 3. Paid a $6.000 cash dividend to the stockholders. 4. Collected $76,000 of the accounts receivable. 5. Paid $53.000 cash for other operating expenses. 6. Performed services for $19.000 cash. 7. Recognized $3.500 of accrued utilities expense at the end of the year. Required: a. Identify the events that result in revenue or expense recognition. C. Identify the events that affect the statement of cash flows, indicating in which section of the statement they should appear Event Revenue Expense Statement of Cash flows b. Based on your response to Requiremento determine the amount of net income reported on the 2018 income statement Computation of net income:

Answer 1

1. and c.

	Revenue	Expense	Statement of cash flows
1			$           40,000	Financial Activity
2	$          82,000		NA
3			$           (6,000)	Financial Activity
4			$            76,000	Operating activity
5		$         53,000	$           (53,000)	Operating activity
6	$         19,000		$                      19,000	Operating activity
7		$       3,500	NA
	$               101,000	$       56,500	$                    76,000	TOTAL

Notes

1. Receiving cash from issue of common share is capital receipt. Only revenue receipts are shown in income statement. Further, capital receipts are financing activity.
2. Performed services mean that the services has been performed but there is no evidence that payment has been received, hence, not impacting cash flows. As per accrual concept, revenue has to be recognized as services performed.
3. Paying dividend is appropriation of profits,so, it is shown in retained earnings statement and not in income statement. This is financial activity as it is related to the equity side of balance sheet.
4. Collection is simply a receipt of cash of services performed. As per accrual, this had been recognized as revenue earlier, so, it won’t have impact in income statement now. Receipt of sales balances relate to such collection, hence, it is operating activity.
5. Operating expenses as explicitly mentioned is expense and operating activity.
6. The services are performed for cash, so , it will result in revenue recognition and cash receipt as operating activity.
7. As per accrual concept, expenses are to be recognized when they accrue for particular period. Since, there is no outflows of cash, it does not impact statement of cash flows

2. Computation of net income

Revenues	$        101,000
Less: Expenses	$        (56,500)
Net income	$           44,500

d.Computation of Cash flows from operating activities

Cash flows from operating activities
Cash earned from revenues (76,000 + 19,000)	$         95,000
Less: Cash paid for expenses	$       (53,000)
Cash flows from operating activities	$         42,000

e.

The before-balance in service revenue accounts is $ 101,000 and the after-balance is $ 0.

f. As stated earlier, dividends are appropriation of profits. The dividends need to be deducted from net income to arrive at retained earnings.

Net income	$       44,500
Less: Dividends	$        (6,000)
Retained earnings	$          38,500

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