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 167,000 197,000 Cash disbursements Salaries paid to employees for services rendered during the year 97,000 107,000 Utilities 33,500 47,000 Purchase of insurance policy 62,100 0 In addition, you learn that the firm incurred utility costs of $38,500 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. Required: 1. & 3. 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.

1. Computation of Net Operating Cash flow

Particulars                                                 Year 1 $      Year 2 $

Net Operating Cash flow

Cash collected from clients                    $167,000     $197,000

Less: Cash Disbursement  

Salaries                                                     $97,000       $107,000

Utilities                                                      $33,500       $47,000

Purchase of insurance policies               $62,100        $0

Net Operating Cash Flow                     -$25,600        $43,000

Therefore, net operating cash flow for year 1 is -$25,600  and year 2 is $43,000.

2. Income Statement for each year

Particulars                                  Year 1 $        Year 2 $

Revenue                                     $184,000    $234,000

Expenses:

Salaries                                       $97,000      $107,000

Utilities                                        $38,500      $42,000

Insurance Policy($62, 100/3)     $20,700      $20,700

Net Income                                 $27,800      $64,300

Working:

Utilities for year 2 = $33,500 + $47,000 - $38,500 = $42,000

3. Computation of account receivables

Particulars                                                     Year 1 $      Year 2 $

Account receivables beginning balance        $0            $17,000

Add: Account billed to client                       $184,000     $234,000

Less: Cash collections from clients             $167,000     $197,000

Ending account receivables                       $17,000       $54,000

Therefore, net amount of account receivables for year 1 is $17,000 and year 2 is $54,000

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