Accrual accounting
Response to the following problem:
Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy.
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Year 1
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Year 2
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Amounts billed to customers for services rendered...........................
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$170,000
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$220,000
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Cash collected from customers.....................................................
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160,000
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190,000
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Cash disbursements....................................................................
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|
|
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Salaries paid to employees for services rendered during the year......................
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90,000
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100,000
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Utilities..................................................................................
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30,000
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40,000
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Purchase of insurance policy...........................................................................
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60,000
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-0-
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In addition, you learn that the company 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. Calculate the net operating cash flow for years 1 and 2.
2. Prepare an income statement for each year similar to Illustration 1-3 on page 8 according to the accrual accounting model.
3. Determine the amount of receivables from customers that the company would show in its year 1 and year 2 balance sheets prepared according to the accrual accounting model.