Calculate the net operating cash flow for years 1 and 2 and determine the amount of receivables from clients that the firm 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.

Question Completion:

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  $184,000  $234,000

Cash collected from clients                                     153,000     183,000

Cash disbursements:

Salaries paid to employees during the year            83,000      93,000

Utilities                                                                       26,500      33,000

Purchase of insurance policy                                   57,900       0

In addition, you learn that the company incurred Utility costs of $31,500 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.

1. Net operating cash flow for

                                                                                   Year 1      Year 2

Cash collected from clients                                     153,000     183,000

Cash disbursements:

Salaries paid to employees during the year          (83,000)    (93,000)

Utilities                                                                     (26,500)    (33,000)

Purchase of insurance policy                                 (57,900)      0

Net operating cash flow                                        ($14,400)   $57,000

1b. Amount of receivables from clients that the firm would show in its year 1 and year 2 balance sheets:

Year 1 = $31,000

Year 2 = $82,000

2. Income Statement for the years ended December 31, Year 1 and Year 2:

                                                   Year 1      Year 2

Service Revenue                    $184,000   $234,000

Expenses:

Salaries                                      83,000        93,000

Utilities                                       31,500        28,000

Insurance expense                   19,300         19,300

Total expenses                       133,800       140,300

Net income before tax         $50,200       $93,700

Explanation:

Calculations:

Accounts Receivables:

Year 1

Bill to clients     $184,000

Cash collected   153,000

Balance              $31,000

Year 2

Balance                $31,000

Bill to clients     $234,000

Cash collected    183,000

Balance              $82,000

Insurance Expenses for each year = $57,900/3 = $19,300

Utilities Incurred:

Year 1  =   $31,500

Paid           26,500

Payable       5,000

Year 2

Paid           33,000

less Yr, 1     5,000

Incurred $28,000

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