2. Hal Smith opened Smith’s Management Company on March 1 of the current year. D
ID: 2331272 • Letter: 2
Question
2. Hal Smith opened Smith’s Management Company on March 1 of the current year. During March, the following transactions occurred and were recorded in the company's books:
1. Smith invested $10,000 cash in the business.
2. The company paid $5,200 for salaries for the month.
3. The company paid $1,600 cash to rent office space for the month.
4. Smith withdrew $5,000 for his personal use from the company.
5. The company received $19,000 cash for management services provided during March.
6. The company provided $12,000 of management services to customers on account.
7. The company paid cash of $500 for monthly utilities.
8. The company received $3,100 cash in advance of providing management services to a customer.
Based on this information, accrual basis net income for March would be:
_____________________
Based on this information, cash basis net income for March would be:
_____________________
Explanation / Answer
Answer
--Revenues are recorded ONLY when Cash is received. If services are provided or Goods are sold but no cash is received, Sales Revenue or Service Revenue will not be recognised.
---Expenses are recorded ONLY when they are paid in Cash,
Transaction no.
Effect
Effect on Net Income
1
Cash balance is increased, and so does the Capital Stock
No Effect
2
Cash is decreased by the amount.
Expenses of $ 5200 to be recorded.
3
Cash is decreased by the amount.
Expenses of $ 1600 to be recorded.
4
Cash and Equity to be decreased.
No Effect
5
Cash balance will increase.
Recorded as revenue of $ 19000
6
No effect if Cash basis is used as no Cash is received.
No revenue is to be recorded as no cash is received.
7
Cash is decreased by the amount.
Expenses of $ 500 to be recorded.
8
Cash is increased.
Since Cash basis is used, advance received will be treated as Revenue even though the same is not earned.
Income Statement (Cash basis)
Revenues:
Transaction 5
$ 19,000.00
Transaction 8
$ 3,100.00
Total revenues
$ 22,100.00
Expenses:
Transaction 2
$ 5,200.00
Transaction 3
$ 1,600.00
Transaction 7
$ 500.00
Total Expenses
$ 7,300.00
Net Income - Cash Basis
$ 14,800.00
Transaction no.
Effect
Effect on Net Income
1
Cash balance is increased, and so does the Capital Stock
No Effect
2
Cash is decreased by the amount.
Expenses of $ 5200 to be recorded.
3
Cash is decreased by the amount.
Expenses of $ 1600 to be recorded.
4
Cash and Equity to be decreased.
No Effect
5
Cash balance will increase.
Recorded as revenue of $ 19000
6
No effect if Cash basis is used as no Cash is received.
No revenue is to be recorded as no cash is received.
7
Cash is decreased by the amount.
Expenses of $ 500 to be recorded.
8
Cash is increased.
Since Cash basis is used, advance received will be treated as Revenue even though the same is not earned.
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