Due March 24 At 11:59 Pm: Read Chapters 7–13

Due March 24 At 1159 Pmread Chapters 7 Through 13complete The Follow

Read Chapters 7 through 13. Complete the following problem:

In 2025, its first year of operations, Thayer Company incurred the following events: Thayer Company performed services for its customers and billed them $100,000. Thayer collected, in cash, $75,000 of the amount billed its customers. Thayer incurred $65,000 of operating expenses on account (they incurred them on credit). Thayer paid, in cash, $40,000 of the accounts payable for operating expenses. Thayer issued common stock and received $80,000 in cash. The company purchased equipment for $15,000 in cash.

REQUIRED: Answer the following questions and show all calculations: What will be the amount of revenue Thayer will have on its Income Statement? What will be Thayer’s Net Income for the year? What is Thayer’s balance in its Cash account at the end of the year? Why is the amount of Cash different from its Net Income for the year?

Paper For Above instruction

Thayer Company’s first year of operations in 2025 presents a typical scenario confronting new businesses, involving recognizing revenue, calculating net income, and determining ending cash balances. Analyzing these financial components requires understanding the fundamental principles of accrual accounting, the nature of cash flows, and the impact of operational and investing activities on the company’s overall financial position.

Revenue Recognition on the Income Statement

According to the revenue recognition principle, revenues are recorded when earned, regardless of when cash is received. In this case, Thayer billed customers $100,000 for services performed, which signifies that revenue is recognized upon service provision, not necessarily upon collection. Therefore, the revenue that will appear on Thayer’s Income Statement is $100,000, representing the total amount billed to customers for services rendered during 2025.

Calculation of Net Income

Net income is computed as total revenues minus total expenses. Thayer’s revenue, as established, is $100,000. Expenses incurred during the year include operating expenses and depreciation (if any, though not specified here). The company incurred $65,000 in operating expenses on credit. Since expenses are recognized when incurred, the full $65,000 will be deducted from revenue. No mention of depreciation on equipment is provided, so it will be excluded from this calculation.

Thus, Net Income = Revenue - Operating Expenses = $100,000 - $65,000 = $35,000.

Calculation of Cash at Year-End

To determine the ending cash balance, consider all cash inflows and outflows during the year:

• Cash inflows:
• Cash received from customers: $75,000
• Cash received from issuing common stock: $80,000

• Cash outflows:
• Payment of operating expenses: $40,000
• Purchase of equipment: $15,000

Adding inflows: $75,000 + $80,000 = $155,000

Subtracting outflows: $40,000 + $15,000 = $55,000

Ending Cash Balance = Beginning Cash (assumed to be zero as this is the first year) + Net Cash Inflows - Outflows = $0 + $155,000 - $55,000 = $100,000

Therefore, Thayer’s cash account balance at year-end is $100,000.

Understanding the Difference between Cash and Net Income

The disparity between the ending cash balance ($100,000) and net income ($35,000) arises because cash flow considers only actual cash transactions, whereas net income accounts for accrued revenues and expenses regardless of cash movement. For instance, Thayer billed $100,000 but only collected $75,000, meaning $25,000 remains receivable. Similarly, operating expenses incurred on credit ($65,000) are recognized in net income but do not impact cash until paid. The purchase of equipment and the initial issuance of stock are financing and investing activities that affect cash but do not influence net income directly.

This illustration emphasizes the importance of analyzing cash flow statements alongside income statements to gain a comprehensive understanding of a company's financial health, especially for startups and businesses in their initial phases.

References

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