Revenue Recognition, Cash and Accrual Bases Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $357 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and projected income statements for Years 2 and 3. Cash-basis income statement: Year 1 Year 2 Year 3 Sales $357,000 $90,000 $90,000 Equipment* $102,000 $0 $0 Salaries and wages 49,310 49,310 49,310 Advertising 5,160 5,160 5,160 Rent and utilities 34,380 34,380 34,380 Net income (loss) $166,150 $1,150 $1,150
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Revenue Recognition, Cash and Accrual Bases
Hathaway Health Club sold three-year memberships at a reduced rate during its opening promotion. It sold 1,000 three-year nonrefundable memberships for $357 each. The club expects to sell 100 additional three-year memberships for $900 each over each of the next two years. Membership fees are paid when clients sign up. The club's bookkeeper has prepared the following income statement for the first year of business and
Cash-basis income statement:
| Year 1 | Year 2 | Year 3 | |
| Sales | $357,000 | $90,000 | $90,000 |
| Equipment* | $102,000 | $0 | $0 |
| Salaries and wages | 49,310 | 49,310 | 49,310 |
| Advertising | 5,160 | 5,160 | 5,160 |
| Rent and utilities | 34,380 | 34,380 | 34,380 |
| Net income (loss) | $166,150 | $1,150 | $1,150 |
*Equipment was purchased at the beginning of year 1 for $102,000 and is expected to last for three years and then to be worth $1,020.
Required:
Convert the income statements for each of the three years to the accrual basis. Indicate a net loss with a minus sign.
| Hathaway Health Club |
| Income Statements |
Sales:
Year 1
Year 2
Year 3
Expenses:
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Salaries and wages
Year 1
Year 2
Year 3
Advertising
Year 1
Year 2
Year 3
Rent and utilities
Year 1
Year 2
Year 3
Total expenses
Year 1
Year 2
Year 3
Net income (loss)
Year 1
Year 2
Year 3
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