Listed below are several transactions that took place during

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 $186,000 $236,000 152,000 182,000 Amounts billed to clients for services rendered Cash collected from clients Cash disbursements Salaries paid to employees for services rendered during the year Utilities Purchase of insurance policy 82,000 92,000 26,000 32,000 57,600 In addition, you learn that the company incurred utility costs of $31,000 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 company 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.

Solution

The amount of receivables from clients that the company would show in its Year 1 and Year 2 balance sheet prepared according to accrual accounting model Year 1 Year 2 Beginning balance $0 $34,000 Add : Amount billed to client $186,000 $236,000 Less : Cash collected from clients $152,000 $182,000 Amount of receivables from Client $34,000 $88,000 Income statement for each year according to accrual accounting model Year 1 Year 2 Service Revenue $186,000 $236,000 Expenses : - Salaries $82,000 $92,000 - Utilities $31,000 $27,000 - Insurance $19,200 $19,200 Net Income $53,800 $97,800 Net operating cash flows Year 1 Year 2 Cash collection from clients $152,000 $182,000 Less : Cash disbursements - Salaries $82,000 $92,000 - Utilities $26,000 $32,000 - Insurance $57,600 $0 Net operating cash flows -$13,600 $58,000