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Chapter 2: Problem 11

During the month, Racoon Co. received \(\$ 319,750\) in cash and paid out \(\$ 269,900\) in cash. a. Do the data indicate that Racoon Co. earned \(\$ 49,850\) during the month? Explain. b. If the balance of the cash account is \(\$ 72,350\) at the end of the month, what was the cash balance at the beginning of the month?

Short Answer

Expert verified
a. Net cash flow does not equal earnings. b. Initial cash balance: \(\$ 22,500\).

Step by step solution

01

Analyzing Cash Flow for Net Earning

First, determine the cash inflow and outflow. Racoon Co. received \(\\( 319,750\) and paid \(\\) 269,900\). Calculate the net cash flow: \(\text{Net cash flow} = \text{Cash received} - \text{Cash paid} = 319,750 - 269,900 = \\( 49,850\). This net cash flow indeed equals \(\\) 49,850\), indicating a surplus of cash during the month, but it does not necessarily mean a net income or profit of the same amount as earnings include non-cash transactions as well.
02

Determining Initial Cash Balance

To find the initial cash balance, use the ending cash balance and adjust for the net cash flow. The formula is: \(\text{Initial balance} = \text{Ending balance} - \text{Net cash flow}\). Thus, \(\text{Initial balance} = 72,350 - 49,850 = \\( 22,500\). Therefore, Racoon Co. started the month with a cash balance of \(\\) 22,500\).

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Key Concepts

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

Understanding Net Cash Flow
Net cash flow is an important concept in cash flow analysis. It represents the difference between the total cash inflows and outflows over a specific period. By calculating the net cash flow, businesses can understand whether they have more cash flowing in than going out. This figure is crucial for determining the cash surplus or deficit during a given time.

The formula to calculate net cash flow is straightforward:
  • Net Cash Flow = Cash Inflows - Cash Outflows
When the cash inflow (the money a company receives) exceeds the cash outflow (the money a company spends), the result is a positive net cash flow. This indicates that the company has more cash on hand than at the start of the period. However, it鈥檚 essential to note that net cash flow does not equate strictly to profit because it excludes non-cash expenses and revenues, which are considered in profit calculations.
Calculating Initial Cash Balance
Understanding the initial cash balance is key to tracking a company's financial health. The initial cash balance is the cash amount a company begins within a period, such as a month.

To find this initial balance, we can adjust the ending cash balance by accounting for the net cash flow for that period:
  • Initial Cash Balance = Ending Cash Balance - Net Cash Flow
In other words, by subtracting the net cash flow from the ending cash balance, we can work backward to determine the amount of cash the company had at the beginning of the period. For Racoon Co., knowing the initial cash balance helps assess how their cash position has changed over the month and allows them to plan adequately for the future.
Distinguishing Cash Inflow and Outflow
Cash inflow and outflow are the core components of cash flow analysis. Both play crucial roles in determining the overall financial position of a company.

Cash Inflow refers to the money coming into the business. This can include revenue from sales, loans received, or capital raised from investors. Regularly monitoring cash inflow is vital to ensuring the business has adequate resources to support operations and growth.

Cash Outflow is the money spent by the business, necessary for operational expenses, debt repayments, and investment in new resources or facilities. By keeping close tabs on cash outflow, a company can manage its expenses efficiently and avoid overspending.

Understanding the balance between cash inflow and outflow ensures a business can maintain its operations smoothly and develop strategies to maximize cash availability.

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Most popular questions from this chapter

Derby Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Terri Burell, Capital; Terri Burell, Drawing; Fees Earned; Rent Expense; Advertising Expense; Utilities Expense; Miscellaneous Expense. Journalize the following selected transactions for March 2009 in a two-column journal. Journal entry explanations may be omitted. Mar. 1. Paid rent for the month, \(\$ 3,000\). 2\. Paid advertising expense, \(\$ 1,800\). 5\. Paid cash for supplies, \(\$ 900\). 6\. Purchased office equipment on account, \(\$ 12,300\). 10\. Received cash from customers on account, \(\$ 4,100\). 15\. Paid creditor on account, \(\$ 1,200\). 27\. Paid cash for repairs to office equipment, \(\$ 500\). 30\. Paid telephone bill for the month, \(\$ 180\). 31\. Fees earned and billed to customers for the month, \(\$ 26,800\). 31\. Paid electricity bill for the month, \(\$ 315 .\) 31\. Withdrew cash for personal use, \(\$ 2,000\).

Identify each of the following accounts of Sesame 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. Billy Eldrod, Capital h. Rent Expense d. Billy Eldrod, Drawing i. Supplies e. Cash j. Wages Expense

On August 7, 2010, Mainsail Co. purchased \(\$ 2,190\) of supplies on account. In Mainsail Co.'s chart of accounts, the supplies account is No. 15 , and the accounts payable account is No. \(21 .\) a. Journalize the August 7, 2010, transaction on page 19 of Mainsail Co.'s two-column journal. Include an explanation of the entry. b. Prepare a four-column account for Supplies. Enter a debit balance of \(\$ 1,050\) as of August 1, 2010. Place a check mark \((\boldsymbol{v})\) in the Posting Reference column. c. Prepare a four-column account for Accounts Payable. Enter a credit balance of \(\$ 15,600\) as of August 1, 2010. Place a check mark \((\boldsymbol{V})\) in the Posting Reference column. d. Post the August 7, 2010, transaction to the accounts.

The following errors occurred in posting from a two-column journal: 1\. A credit of \(\$ 6,150\) to Accounts Payable was not posted. 2\. A debit of \(\$ 1,500\) to Cash was posted to Miscellaneous Expense. 3\. A credit of \(\$ 270\) to Cash was posted as \(\$ 720\). 4\. A debit of \(\$ 4,520\) to Wages Expense was posted as \(\$ 4,250\). 5\. An entry debiting Accounts Receivable and crediting Fees Earned for \(\$ 11,000\) was not posted. 6\. A debit of \(\$ 900\) to Accounts Payable was posted as a credit. 7\. A debit of \(\$ 1,150\) to Supplies was posted twice. Considering each case individually (i.e., assuming that no other errors had occurred), indicate: (a) by "yes" or "no" whether the trial balance would be out of balance; (b) if answer to (a) is "yes," the amount by which the trial balance totals would differ; and (c) whether the Debit or Credit column of the trial balance would have the larger total. Answers should be presented in the following form, with error (1) given as an example:

a. During July, \(\$ 90,300\) was paid to creditors on account, and purchases on account were \(\$ 115,150\). Assuming the July 31 balance of Accounts Payable was \(\$ 39,000\), determine the account balance on July \(1 .\) b. On May 1 , the accounts receivable account balance was \(\$ 36,200\). During May, \(\$ 315,000\) was collected from customers on account. Assuming the May 31 balance was \(\$ 41,600\), determine the fees billed to customers on account during May. c. On April 1, the cash account balance was \(\$ 18,275\). During April, cash receipts totaled \(\$ 279,100\) and the April 30 balance was \(\$ 13,200\). Determine the cash payments made during April.
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