14. The following events occurred at Jack Company during its first year of busin

Question

14. The following events occurred at Jack Company during its first year of business: a. To establish the company, the two owners contributed a total of $60,000 in exchange for common stock b. Grooming service revenue for the first year amounted to $175,000, of which $50,000 was on account c. Customers owe $15,000 at the end of the year from the services provided on account. d. At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for $15,000 per year and make a $3,000 refundable security deposit. The first year's lease payment and the security deposit were paid at the beginning of the year. At the beginning of the year, the company purchased a patent at a cost of $120, be used for dog grooming. The patent is expected to be useful for ten years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder. 000 for a revolutionary system to e. expenses, including amortization of the patent and rent on the storage building, totaled $90,000 for the first year. No expenses were accrued or unpaid at the end of the year. The company declared and paid a S25,000 cash dividend at the end of the first year. g. REQUIRED: I. Prepare an income statement for the first year. 2. Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section. 3 Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is a difference. 4. Prepare a balance sheet as of the end of the first year.

Explanation / Answer

1. Income statement

2. Statement of cash flows

3. The company generated less cash flow from operatins than earned in net income. The difference of $3000 is explained as under:

4. Balance sheet

Revenue: Service revenue $175000 Total revenue $175000 Expenses: Operating expenses 90000 Total expenses $90000 Net income $85000

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