Part 1:
Analysis of Cash Flow for a Small Business
Charles, a financial consultant, has been self-employed for two years. His list of clients has grown, and he is earning a reputation as a shrewd investor. Charles rents a small office, uses the pool secretarial services, and has purchased a car that he is depreciating over three years. The following income statements cover Charles’s first two years of business:
Charles believes that he should earn more than $11,500 for working very hard for two years. He is thinking about going to work for an investment firm where he can earn $40,000 per year. What would you advise Charles to do? Support your answer using the given data and what you learned from chapter 2 reading.
Part 2:
Revenue Recognition
You are controller for an architectural firm whose accounting year ends on December 31. As part of the management team, you receive a year-end bonus directly related to the firm’s earnings for the year. One of your duties is to review the transactions recorded by the bookkeepers. A new bookkeeper recorded the receipt of $10,000 in cash as an increase in cash and an increase in service revenue. The $10,000 is a deposit and the bookkeeper explains to you that the firm plans to provide the services to the client in March of the following year.
Required
- Did the bookkeeper correctly record the client’s deposit? Explain your answer.
- What would you do as controller for the firm? Do you have a responsibility to do anything to correct the books? Explain your answer.
Initial post due by Thursday.
