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Chapter 2: Problem 11

During the month, Harpoon Co. received \(\$ 479,250\) in cash and paid out \(\$ 312,380\) in cash. a. Do the data indicate that Harpoon Co. earned \(\$ 166,870\) during the month? Explain. b. If the balance of the cash account is \(\$ 241,925\) at the end of the month, what was the cash balance at the beginning of the month?

Short Answer

Expert verified
a. No, cash flow doesn't equate to earnings. b. Initial cash balance was $75,055.

Step by step solution

01

Analyzing Harpoon Co.'s Earnings

To determine if Harpoon Co. earned $166,870 during the month, we need to calculate the difference between the cash received and the cash paid out. The cash received equals $479,250 and the cash paid equals $312,380.
02

Calculating Net Cash Flow

The net cash flow for Harpoon Co. is determined by subtracting the cash paid out from the cash received. Thus, the net cash flow is:\[ 479,250 - 312,380 = 166,870 \]This shows the cash inflow exceeded cash outflow by $166,870.
03

Evaluating Earnings vs. Cash Flow

Earnings, also referred to as net income, are not solely determined by net cash flow because they involve other factors like accruals and non-cash expenses. Hence, the data provided are insufficient to conclude that the company earned $166,870 based purely on cash transactions.
04

Finding the Initial Cash Balance

Given the cash balance at the end of the month is \(241,925 and the net cash flow for the month is \)166,870, we can find the initial cash balance by adding the net cash flow to the ending balance and then solving for the initial cash balance. Let the initial cash balance be represented as \( x \). The equation is:\[ x + 166,870 = 241,925 \]
05

Solving for Initial Cash Balance

To find the initial cash balance, we rearrange the equation:\[ x = 241,925 - 166,870 \]Calculating yields:\[ x = 75,055 \].Therefore, the initial cash balance at the beginning of the month was $75,055.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cash Flow Analysis
Understanding cash flow analysis is crucial for assessing the financial health of a company like Harpoon Co. Cash flow analysis involves tracking the flow of cash into and out of the business over a specific period. This helps business owners identify whether a company can generate sufficient cash to continue operations or to expand.

In Harpoon Co.'s case, the cash inflow was $479,250, emanating from various sources such as sales revenue, investment income, or other business activities. On the other hand, cash paid out amounted to $312,380. This amount could have been spent on expenses like salaries, utilities, or purchasing supplies.
  • Net Cash Flow: Calculated by subtracting the total cash outflow from the cash inflow.
  • A positive net cash flow indicates more cash was received than spent.
  • Higher inflow than outflow suggests good liquidity, enabling the company to meet its obligations and invest.
This analysis offers insights into Harpoon Co.'s liquidity but doesn't directly reflect profitability.
Net Income Calculation
Net income, or profit, is a measure of a company's profitability after accounting for all expenses. While cash flow gives us a snapshot of liquid assets, net income encompasses a broader financial picture, including non-cash transactions and accrual accounting.

To determine net income, businesses adjust their net cash flow by:
  • Adding back non-cash expenses like depreciation.
  • Including accrued revenues and expenses not yet paid.
  • Accounting for one-off income or expenses.
For Harpoon Co., while their net cash flow was $166,870, this does not equate to net income because it excludes these factors. Solely relying on cash flow gives an incomplete view. Thus, assessing net income requires further details from the business's financial statements, such as the income statement, to factor in all revenues and expenses.
Initial Cash Balance Determination
Determining the initial cash balance is an essential step in understanding a company's cash flow during a period. The initial cash balance indicates the amount of cash a company had at the start of the month or year.

For Harpoon Co., the end-of-month cash balance is given as \(241,925, and the net cash flow for the month is \)166,870. To find the initial cash balance, you subtract the net cash flow from the end balance. The equation is:
\[ x + 166,870 = 241,925 \]
Solving for the initial balance \(x\), we rearrange it to:
\[ x = 241,925 - 166,870 \]
Thus, the initial cash balance comes out to be $75,055.
  • Initial cash balance helps in preparing financial plans and understanding past financial performance.
  • Provides context for evaluating cash flow statements.
Knowing this balance is key to comprehending the financial trajectory of a company.

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Most popular questions from this chapter

Mandalay Interiors is owned and operated by Angie Stowe, an interior decorator. In the ledger of Mandalay Interiors, the first digit of the account number indicates its major account classification (1-assets, 2-liabilities, 3 -owner's equity, 4 -revenues, 5 -expenses). The second digit of the account number indicates the specific account within each of the preceding major account classifications. Match each account number with its most likely account in the list below. The account numbers are \(11,12,13,21,31,32,41,51,52\), and 53 . \(\begin{array}{ll}\text { Accounts Payable } & \text { Fees Earned } \\ \text { Accounts Receivable } & \text { Land } \\ \text { Angie Stowe, Capital } & \text { Miscellaneous Expense } \\ \text { Angie Stowe, Drawing } & \text { Supplies Expense } \\ \text { Cash } & \text { Wages Expense }\end{array}\)

The following selected transactions were completed during August of the current year: 1\. Billed customers for fees earned, \(\$ 13,750\). 2\. Purchased supplies on account, \(\$ 1,325\). 3\. Received cash from customers on account, \(\$ 8,150\). 4\. Paid creditors on account, \(\$ 800\). a. Journalize the above transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. b. Post the entries prepared in (a) to the following T accounts: Cash, Supplies, Accounts Receivable, Accounts Payable, Fees Earned. To the left of each amount posted in the accounts, place the appropriate number to identify the transactions.

During the month, Witherspoon Labs Co. has a substantial number of transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1\. Accounts Payable 5\. Insurance Expense 2\. Accounts Receivable 6\. Keith Dupree, Drawing 3\. Cash 7\. Supplies Expense 4\. Fees Earned

The following errors took place in journalizing and posting transactions: a. A \(\$ 940\) purchase of supplies for cash was recorded as a debit to Supplies Expense and a credit to Accounts Payable. b. Cash of \(\$ 2,750\) received on account was recorded as a debit to Fees Earned and a credit to Cash. Journalize the entries to correct the errors. Omit explanations.

Identify each of the following accounts of Sydney Services Co. as asset, liability, owner's equity, revenue, or expense, and state in each case whether the normal balance is a debit or a credit. a. Accounts Payable f. Fees Earned b. Accounts Receivable g. Office Equipment c. Boyd Magnus, Capital h. Rent Expense d. Boyd Magnus, Drawing i. Supplies e. Cash j. Wages Expense
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