Chapter 1, Problem 1.1E

Accrual accounting

• LO1–2

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	$170,000	$220,000
Cash collected from clients	160,000	190,000
Cash disbursements
Salaries paid to employees for services rendered during the year	90,000	100,000
Utilities	30,000	40,000
Purchase of insurance policy	60,000	–0–

In addition, you learn that the firm incurred utility costs of $35,000 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. Calculate the net operating cash flow for years 1 and 2.

2. Prepare an income statement for each year similar to Illustration 1–4 according to the accrual accounting model.

3. 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.