Maria Hernandez & Associates
Essay by ipoppy • October 20, 2017 • Essay • 1,097 Words (5 Pages) • 1,972 Views
1. (a)How would you have reported on operations of Maria Hernandez & Associates?
1) Maria acquired revenue of $47,000, and accordingly received $40,000 cash and retained $7,000 Accounts Receivable.
Dr: Cash $40,000
Accounts Receivable $7,000
Cr: Revenue $47,000
2) Maria paid $900 cash for additional office supplies. And $1,700 previous office supplies were depleted.
Dr: Office supplies $900
Cr: Cash $900
Dr: Managing expense $1,700
Cr: Office supplies $1,700
3) Maria paid $3,000 for the rent of August and prepaid another $3,000 for September. Also, Maria paid $33,000 for the expenses and payroll.
Dr: Managing costs $3,000
Advance $3,000
Cr: Cash $6,000
Dr:Payroll payable & Expenses $33,000
Cr: Cash $33,000
- Maria purchased equipment and software for $11,000 and half of the amount was on credit.
Dr: Equipment and software $11,000
Cr: Cash $5,500
Accounts Payable $5,500
5) Maria should accrue $200 interest although there was no need to pay at that moment.
Dr: Financing Costs $200
Cr: Accrued Interest Payable $200
6) And the equipment and software experienced the depreciation of $1,500.
Dr: Depreciation Expense $1,500
Cr: Accumulated Depreciation $1,500
(b)Had the company made a profit as Maria Hernandez believed?
Income statement of July & August, 2004 | |
Operating Income | 47,000 |
Management Expense | 40,700 |
Depreciation | 1,500 |
Interest Expense | 200 |
Net Income | 4,600 |
Operating Income: 40,000+7,000=47,000
Management Expense: Include rent expense, utility bills, a repair of equipment, salary expense and supplies expense 33,000+6,000+(5,000+900-42,000)=40,700
Depreciation: 27,000/3/12*2=1,500
Rent Expense: 3,000*2=6000
Interest Expense: 20,000*6%*2/12=200
So the total net income is $4,600, the company had made a profit.
(c)If so, how would you explain why the cash in the bank has declined?
Considering Maria adopted Accrual rather than Cash to record transactions, the inflow and outflow of cash may have nothing to do with the profit and loss. For example,
- Revenue recognition: we will recognize income when we finish the projects but our cash will increase only when we receive cash from clients.
- Depreciation: the cash or bank account might decline when paying the office supplies and stationeries but according to the theory of accrual we should allocate the expense across accounting periods according to the consumption of the fixed assets. In other words, the one-time purchase of asset decrease future outflow of cash.
- Prepaid rent: like depreciation, it won’t affect the income while it has a great impact on the cash remained.
To clarify our opinion, we can make a cash flow statement to compare with the income statement
Cash Flow Statement
Items | 2004.06-2004.08 |
1.Cash Flows from Operating Activities: | |
Cash received from sales of goods or rendering of services | 40,000 |
Cash paid for operating leases | 12,000 |
Cash paid to and on behalf of employees | 33,000 |
Other cash relating to operating activities | 5,000 |
Net cash flows from operating activities | (10,000) |
2.Cash Flows from Investing Activities: | |
Cash paid to acquire fixed assets, intangible assets and other long-term assets | 39,000 |
Net cash flows from investing activities | (39,000) |
3.Cash Flows from Financing Activities: | |
Proceeds from issuing shares | 30,000 |
Proceeds from borrowings | 20,000 |
Net cash flows from financing activities | 50,000 |
Net Increase in Cash and Cash Equivalents | 1,000 |
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