Question

Kelly Company had cash receipts from customers in 2014 of $150,220. Cash payments for operating expenses were $97,860. Kelly has determined that at January 1, accounts receivable was $13,810, and prepaid expenses were $18,340. At December 31, accounts receivable was $18,980, and prepaid expenses were $24,990. Compute (a) service revenue and (b) operating expenses.

Answer 1

Concepts and reason

Revenue: Revenue is the income received by a company from its business operations. This is the top line of the income statement. Expenses are deducted from top line to attain bottom line of the income statement, net income. Revenue is recorded as and when received in cash accounting method, but revenue is recorded when it is recognized in accrual accounting method.

Expenses: Expenses are money spent by a company to generate revenue. Expenses are reported on the income statement and include cash expenses, non-cash expenses like depreciation, and written off benefits due to uncertainty.

Fundamentals

Cash Receipts: It includes the receipt of cash from sales and accounts receivable.

Cash Payments: It includes the payment of cash to the supplies and the payment of expenses.

Accounts receivable: Accounts receivable is a financial claim or declaration which signifies that seller receives cash from the buyer for the goods or services received within a short period.

Prepaid expense: Prepaid expense refers to the expenses paid in advance. This is the kind of expenses which are paid but yet to be incurred during the accounting year.

Sales or service revenue: The amount earned or realized by selling goods or services is known as sales or service revenue. This is the main source of revenue for a company. This is usually referred to as gross sales or service revenue.

Use the following formula to calculate service revenue:

Operating expenses: The expense that is incurred in the business for the activities not directly related to the manufacture of goods or services. Such expenses are categorized as selling expense, general and administrative expense.

Use the following formula to calculate operating expenses:

(a)

Compute service revenue as shown below:

(b)

Calculate the amount of operating expenses as below:

Ans: Part a

The amount of service revenue is $155,390.

Part b

The amount of operating expenses is $91,210.