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 Amounts billed to clients for services rendered $182,000 $232,000 Cash collected from clients 166,000 196,000 Cash disbursements Salaries paid to employees for services rendered during the year 96,000 106,000 Utilities 33,000 46,000 Purchase of insurance policy 61,800 0 In addition, you learn that the firm incurred utility costs of $38,000 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 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.
Requirement 1:
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. (Net cash outflows should be indicated by a minus sign). Year 1 Year 2
1.Net operating cash flow
3.Receivables
Requirement 2
Prepare an income statement for each year according to the accrual accounting model. Pete, Pete, and ROoy
Income Statements
Year 1Year 2Revenues
Expenses:
Salaries
Utilities
Insurance
Net income (loss)

Pete, Pete, & Roy

1. Net Operating Cash Flow for years 1 and 2:

                                                Year 1           Year 2

Cash from Customers         $166,000       $196,000

Cash to employees                -96,000        -106,000

Utilities paid                            -33,000          -46,000

Insurance                                -68,000           0

Net Operating Cash Flow     -31,000           44,000

2. Pete, Pete, and Roy Income Statements

                                  Year 1           Year 2

Revenues                $182,000      $232,000

Expenses:

Salaries                     -96,000        -106,000

Utilities                      -38,000          -41,000

Insurance                 -20,600         -20,600

Net income (loss)    27,400           64,400

3. Accounts Receivables

                                  Year 1           Year 2

Beginning Balance    $0                   $16,000

Service Revenue    $182,000       $232,000

Cash Collection      -166,000         -196,000

Balance                    $16,000          $52,000

Explanation:

1. The net operating cash flow is the difference between the cash inflows and the cash outflows during the period.  The inflows represent cash collections while the outflows represent cash disbursements.

2. The net income is a function of service revenue minus all business expenses incurred during the period, whether actually paid for or not.

3. Receivable balance is the difference between the value of services rendered to customers and the cash collections from the customers.  The second year's receivables will include the first year's balance.

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