Maria Hernandez & Associates
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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 $47,0002) Maria paid $900 cash for additional office supplies. And $1,700 previous office supplies were depleted.Dr: Office supplies $900 Cr: Cash $900Dr: Managing expense $1,700 Cr: Office supplies $1,7003) 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 $6,000Dr: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 $5,5005) Maria should accrue $200 interest although there was no need to pay at that moment.Dr: Financing Costs $200 Cr: Accrued Interest Payable $2006) 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, 2004Operating Income47,000Management Expense 40,700Depreciation1,500Interest Expense200Net Income4,600Operating Income: 40,000+7,000=47,000Management 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=1,500Rent Expense: 3,000*2=6000Interest Expense: 20,000*6%*2/12=200So 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 StatementItems2004.06-2004.081.Cash Flows from Operating Activities:Cash received from sales of goods or rendering of services40,000Cash paid for operating leases12,000Cash paid to and on behalf of employees33,000Other cash relating to operating activities5,000Net 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 assets39,000Net cash flows from investing activities(39,000)3.Cash Flows from Financing Activities:Proceeds from issuing shares30,000Proceeds from borrowings20,000Net cash flows from financing activities50,000Net Increase in Cash and Cash Equivalents1,000