Hey sorry but I'm having some trouble with income statements. I got the salaries right but other than that I'm lost.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 1Year 2Amounts billed to clients for services rendered$170,000 $220,000 Cash collected from clients 160,000  190,000 Cash disbursements      Salaries paid to employees for services rendered during the year 90,000  100,000 Utilities 30,000  40,000 Purchase of insurance policy 60,000  0   In addition, you learn that the firm incurred utility costs of $35,000 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.Revenuesnot attemptednot attemptedExpenses:  Salaries90,000selected answer correct100,000selected answer correctUtilities30,000selected answer incorrect40,000selected answer incorrectInsurance60,000selected answer incorrect0selected answer incorrectNet income (loss)

Question
Asked Aug 25, 2019

Hey sorry but I'm having some trouble with income statements. I got the salaries right but other than that I'm lost.

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 $ 170,000   $ 220,000  
Cash collected from clients   160,000     190,000  
Cash disbursements            
Salaries paid to employees for services rendered during the year   90,000     100,000  
Utilities   30,000     40,000  
Purchase of insurance policy   60,000     0  
 

 
In addition, you learn that the firm incurred utility costs of $35,000 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.

Revenues not attempted not attempted
Expenses:    
Salaries 90,000selected answer correct 100,000selected answer correct
Utilities 30,000selected answer incorrect 40,000selected answer incorrect
Insurance 60,000selected answer incorrect 0selected answer incorrect
Net income (loss)

 

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Expert Answer

Step 1

Operating activities: Operating activities include cash inflows and outflows from business operations.

Receivables: Receivables refer to an amount to be received in future. General classifications of receivables are accounts receivable, note receivable, and other receivables.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Step 2

Calculate the net operating cash flow for Year 1 and Year 2:

Operating cash flow
Particulars
Year 1
Year 2
Cash collected from customers
Less:
Cash disbursement
Salaries
Utilities
Purchase of insurance policy
|Net operating cash flow
S160,000
S190,000
(S90,000) (S100,000)|
($30,000) (S40,000)|
($60,000)|
($20,000) S50,000
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Operating cash flow Particulars Year 1 Year 2 Cash collected from customers Less: Cash disbursement Salaries Utilities Purchase of insurance policy |Net operating cash flow S160,000 S190,000 (S90,000) (S100,000)| ($30,000) (S40,000)| ($60,000)| ($20,000) S50,000

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Step 3

Prepare an income statement for Year...

Income statement
Particulars
Year 1
Year 2
$170,000 $220,000
Revenues
Expenses:
Salaries
Utilities
Purchase of insurance policy
Net income
($90,000) ($100,000)
($35,000) ($35,000)|
($20,000) ($20,000)
S25,000 $65,000
Note 1: Utility expense forthe year 1 is $35,000 and the payment is made for $30,000. Thus, the
utilities remain unpaid in year 1 are
$5,000 ($35,000-$30,000). Utilities paid in Year 2 are
$40,000 which includes $5,000 of year 1. Thus, utilities for year 2 are $35,000
(S40,000-$5,000)
Note 2: Insurance policy covers for three years. Therefore the cost for insurance policy is
($60,000
$20,000 each year
3
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Income statement Particulars Year 1 Year 2 $170,000 $220,000 Revenues Expenses: Salaries Utilities Purchase of insurance policy Net income ($90,000) ($100,000) ($35,000) ($35,000)| ($20,000) ($20,000) S25,000 $65,000 Note 1: Utility expense forthe year 1 is $35,000 and the payment is made for $30,000. Thus, the utilities remain unpaid in year 1 are $5,000 ($35,000-$30,000). Utilities paid in Year 2 are $40,000 which includes $5,000 of year 1. Thus, utilities for year 2 are $35,000 (S40,000-$5,000) Note 2: Insurance policy covers for three years. Therefore the cost for insurance policy is ($60,000 $20,000 each year 3

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