Valmont, Inc. experienced the following events in 2012, in its first year of operation.
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.
Required
a. Record the events in general ledger accounts under an accounting equation. In the last column of the table, provide appropriate account titles for Retained Earnings amounts. The first transaction has been recorded as an example.
b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for the 2012 accounting period.
c. Why is the amount of net income different from the amount of net cash flow from operating activities?
a. To record the events in general ledger accounts under an accounting equation, we need to identify the accounts affected by each event and their corresponding values. Here's how each event can be recorded:
1. Received $20,000 cash from the issue of common stock.
- Increase in Cash (Assets) +$20,000
- Increase in Common Stock (Equity) +$20,000
2. Performed services on account for $50,000.
- Increase in Accounts Receivable (Assets) +$50,000
- Increase in Service Revenue (Revenue) +$50,000
3. Paid utility expense of $12,500.
- Decrease in Cash (Assets) -$12,500
- Decrease in Utilities Expense (Expense) -$12,500
4. Collected $39,000 of the accounts receivable.
- Increase in Cash (Assets) +$39,000
- Decrease in Accounts Receivable (Assets) -$39,000
5. Recorded $9,000 of accrued salaries at the end of the year.
- Increase in Salaries Expense (Expense) +$9,000
- Increase in Accrued Salaries (Liability) +$9,000
6. Paid a $5,000 cash dividend to the shareholders.
- Decrease in Cash (Assets) -$5,000
- Decrease in Retained Earnings (Equity) -$5,000
b. To prepare the financial statements for the 2012 accounting period based on the given events, we need to summarize and categorize the information. Here are the financial statements required and their preparation:
Income Statement:
- Revenue:
- Service Revenue: $50,000
- Expenses:
- Utilities Expense: $12,500
- Salaries Expense: $9,000
- Net Income: $50,000 - $12,500 - $9,000 = $28,500
Statement of Changes in Stockholders' Equity:
- Common Stock: $20,000
- Retained Earnings (Beginning of the Year): $0
- Net Income: $28,500
- Dividends: -$5,000
- Retained Earnings (End of the Year): $28,500 + $20,000 - $5,000 = $43,500
Balance Sheet:
- Assets:
- Cash: $20,000 + $39,000 - $12,500 - $5,000 = $41,500
- Accounts Receivable: $50,000 - $39,000 = $11,000
- Liabilities:
- Accrued Salaries: $9,000
- Equity:
- Common Stock: $20,000
- Retained Earnings: $43,500
- Total: $41,500 + $11,000 + $9,000 = $61,500
Statement of Cash Flows:
- Cash provided by operating activities:
- Service Revenue received in cash ($50,000)
- Collections from accounts receivable ($39,000)
- Payments of utilities expense ($12,500)
- Payments of accrued salaries ($9,000)
= $50,000 + $39,000 - $12,500 - $9,000 = $67,500
- Cash used in financing activities:
- Dividends paid ($5,000)
- Net increase in cash:
- Cash provided by operating activities ($67,500)
- Cash used in financing activities ($5,000)
= $67,500 - $5,000 = $62,500
c. The amount of net income can be different from the amount of net cash flow from operating activities due to non-cash transactions or timing differences between the recognition of revenues and expenses and the cash receipts and payments associated with them. For example, accounts receivable collected in cash, accrued salaries, and other non-cash expenses impact net income but may not directly affect cash flows during the same period. Similarly, depreciation expense is deducted from net income but does not involve any cash outflows. Changes in working capital, such as changes in accounts receivable or accounts payable, also affect net income but may not result in immediate cash flow changes. These factors contribute to the difference between net income and net cash flow from operating activities.
a. Recording the events in general ledger accounts under an accounting equation:
| Event | Assets | Liabilities | Equity | Retained Earnings |
|----------------|-----------------|-------------------|----------------|-----------------------------|
|1. Cash received from issue of common stock | +$20,000 | | +$20,000 | |
|2. Services performed on account | +$50,000 | | +$50,000 | |
|3. Utility expense paid | -$12,500 | | | |
|4. Collections from accounts receivable | +$39,000 | | | |
|5. Accrued salaries recorded | +$9,000 | | | |
|6. Cash dividend paid to shareholders | -$5,000 | | | |
b. Financial Statements:
Income Statement for the 2012 accounting period:
Revenues:
Services performed on account: +$50,000
Expenses:
Utility expense: -$12,500
Net Income: $37,500
Statement of Changes in Stockholders' Equity for the 2012 accounting period:
Common Stock: +$20,000
Retained Earnings (from net income): +$37,500
Dividends: -$5,000
Total Stockholders' Equity: $52,500
Balance Sheet as of December 31, 2012:
Assets:
Cash: +$61,500 ($20,000 + $39,000 + $2,500)
Accounts Receivable: $0 (Collections fully made)
Prepaid Salaries: +$9,000
Total Assets: $70,500
Liabilities:
None
Equity:
Common Stock: $20,000
Retained Earnings: $52,500
Total Equity: $72,500
Statement of Cash Flows for the 2012 accounting period:
Cash Flows from Operating Activities:
Collections from accounts receivable: +$39,000
Payment of utility expense: -$12,500
Accrued salaries recorded: +$9,000
Net Cash Flow from Operating Activities: +$35,500
Cash Flows from Financing Activities:
Cash received from issue of common stock: +$20,000
Cash dividend paid to shareholders: -$5,000
Net Cash Flow from Financing Activities: +$15,000
Net Increase in Cash: +$50,500 (+$35,500 + $15,000)
c. The amount of net income and net cash flow from operating activities can be different due to non-cash items such as accruals and non-operating activities. In this case, the accrued salaries of $9,000 recorded at the end of the year would increase net income but not affect the cash flow. Additionally, other non-operating activities like dividends paid would also impact the net cash flow but not necessarily net income.