CHAPTER 12 433 Accruols Deferrok and the Worksheet tical Thi

CHAPTER 12 433 Accruols, Deferrok, and the Worksheet tical Thinking Problem 12.2 Net Prov hen Sara family business, AAA Couriers, until it could be sold. Vu\'s father died suddenly, Sara had just completed the semester in college, so un thes a successful operation and provided ample money to meet the family\'s needs hut she Under her father\'s direction, but she Since n cash, Sara figured that she would do all right as long as was delighted to watch the cash balance increase from Sara was majoring in ood job of running the business so it would command a good selling price of was eager to do a the s rformed were paid i increased. Thus, she was delighted to watch the cash balance 24. 00at during the two month she had been in charge when she was presented an incon did not that you are taking an accounting class. Sara brings the income stater the beginning of the first month to $63,028 at the end of the second month-an increase y the company\'s bookkeeper, she could not understand why it did not S4228 during as income but instead reported only $21,100 as net income. ou and asks if you can help her understand the difference AAA COURIERS Income Statement Months of June and July, 2016 Operating Revenues Delivery Fees Operating Expenses Salaries and Related Taxes Gasoline and Oil Repairs Expense Supplies Expense Insurance Expense Depreciation Expense Total Operating Expense S205,018 S128,224 31,000 6,570 2,268 13,000 183,918 S 21,100 Net Income In addition, Sara permits you to examine the accounting records, which show that the balance of Salaries Payable was $2.680 at the beginning of the first month but had increased to $4.240 at the end of the second month. Most of the balance in the Insurance Expense account reflects monthly insurance payments covering only one month each. However, the Prepaid Insurance account had decreased S300 during the two months, and all supplies had been purchased before Sara took over. The balances of the company\'s other asset and liability accounts showed no changes. l. Explain the cause of the difference between the increase in the Cash account balance and the net income for the two months 2· Prepare a schedule that accounts for this difference. BUSINESS CONNECTIONS Out of Balance The president of Murray Stainless Steel Corporation has told you to go out to the factory and count \"Ethical merchandise inventory. He said the stockholders were coming for a meeting and he wanted to put on a good show. He asked you to make the inventory a bit heavy by counting one row twice. The higher ending inventory will show a higher net income. What should you do? Ethical DILEM LEA

Solution

1 Causes of difference between Cash account balance and net income: Depreciation expense: It is a non-cash expense which implies the wearing out of assets in the company for a period. Salaries and related taxes: This account shows all the expenses incurred in relation to salaries and not the expenses paid. We need to find out the salaries and sales tax paid for the period as follows: Beginning balance 2680 Add:Expenses incurred 128224 130904 Less:Ending balance 4240 Expenses paid 126664 Supplies expenses: Supplies expenses shows the supplies used during the period and not purchased.So no cash payment involved here. Insurance expense: This account shows all the expenses incurred in relation to insurance and not the expenses paid. Prepaid insurance account shows the insurance paid in advance. Reduction in prepaid insurance shows that reduced amount is related to current period insurance expense. 2 Schedule for difference between Cash account balance and net income: Net income 21100 Add: Depreciation expense 13000 Salaries and related taxes (128224-126664) 1560 Supplies expense 2268 Insurance expense 300 17128 Increase in cash 38228