Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615



Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem

Net income

On January 1, 2015, Dr. Marcie Cousins established Health-Wise Medical, a medical practice organized as a proprietorship. The following conversation occurred the following August between Dr. Cousins and a former medical school classmate, Dr. Avi Abu, at an American Medical Association convention in Seattle:

Dr. Abu: Marcie, good to see you again. Why didn’t you call when you were in Miami? We could have had dinner together.

Dr. Cousins: Actually, I never made it to Miami this year. My husband and kids went up to our Vail condo twice, but I got stuck in Jacksonville. I opened a new consulting practice this January and haven‘t had any time for myself since.

Dr. Abu: I heard about it ... Health ... something . . . right?

Dr. Cousins: Yes, Health-Wise Medical. My husband chose the name.

Dr. Abu: I’ve thought about doing something like that. Are you making any money? I mean, is it worth your time?

Dr. Cousins: You wouldn’t believe it. I started by opening a bank account with $25,000, and my July bank statement has a balance of $80,000. Not bad for six months—all pure profit.

Dr. Abu: Maybe I’ll try it in Miami! Let‘s have breakfast together tomorrow and you can fill me in on the details.

Comment on Dr.Cousins’ statement that the difference between the opening bank balance ($25,000) and the July statement balance ($80,000) is pure profit.

To determine

Net Income:  The net income is the profit generated in the business over a particular period of time. Net income is calculated by deducting the total expenses from the total revenue, in adherence to the accrual principle of accounting.

To Comment: On the statement of Dr. C whether the Bank balance show pure profit.

  • The difference in the two bank balances, $55,000 ($80,000 – $25,000), may not be pure profit from an accounting perspective.
  • The January balance is the initial investment of Dr. C and not considered as profit.
  • Using only the difference between the two bank account balances ignores such factors as accounts receivables, accounts payable and additional investments that Dr. C may have made in the business during the period, or withdrawals during the period that Dr...

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