17.07.2022 - 12:10

# Holmes Cleaning Service began operation on January 1, 2016. The company experienced the following events for its first year of operations: Events Affecting 2016: 1. Provided $84,000 of cleaning services on account. 2. Collected$76,000 cash from accoun

Question:

Holmes Cleaning Service began operation on January 1, 2016. The company experienced the following events for its first year of operations:

Events Affecting 2016:

1. Provided $84,000 of cleaning services on account. 2. Collected$76,000 cash from accounts receivable.

3. Paid salaries of $28,500 for the year. 4. Adjusted the accounts to reflect management’s expectations that uncollectible accounts expense would be$1,650. The expense was determined using the percent of the revenue method.

Prepare an income statement, balance sheet, and statement of cash flows for 2016.

Income Statement ------------------ Revenues: $84,000 Less: Uncollectible Accounts Expense:$1,650 Net Revenues: $82,350 Less: Salaries Expense:$28,500 Net Income: $53,850 Explanation: The income statement shows the company's revenues and expenses for the year. The revenues for Holmes Cleaning Service were$84,000, but management expects that $1,650 of this amount will not be collectable. As a result, the company adjusts its accounts to reflect this uncollectible amount as an expense. After deducting this expense and salaries paid for the year, the company has a net income of$53,850. Balance Sheet -------------- Assets: Accounts Receivable: $7,500 [$84,000 - $76,000 collected] Cash:$76,000 Total Assets: $83,500 Liabilities: None Equity: Retained Earnings:$53,850 Total Equity: $53,850 Total Liabilities and Equity:$83,500 Explanation: The balance sheet shows the company's assets, liabilities, and equity at a specific point in time. As Holmes Cleaning Service does not have any liabilities, its total equity is equal to its total assets. The company had accounts receivable of $7,500 outstanding at the end of the year (i.e.,$84,000 total revenues less $76,000 total collections). Its cash balance at year-end was$76,000. The company retains $53,850 of its earnings for the year in its retained earnings account. Statement of Cash Flows ----------------------- Cash Flows from Operating Activities: Cash collected from customers:$76,000 Cash payments for salaries: ($28,500) Uncollectible accounts expense: ($1,650) Net Cash Flows from Operating Activities: $45,850 Explanation: The statement of cash flows shows the change in the company's cash balance from its operating, investing, and financing activities. Holmes Cleaning Service's only operating activity for the year was providing cleaning services on account and collecting cash from customers. The company had cash collections of$76,000 and paid salaries of $28,500, resulting in a net cash inflow of$47,500. However, the company also had an uncollectible accounts expense of $1,650, which reduces its net cash inflow to$45,850.
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