Cash Flow And Revenue Recognition

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:

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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

  1. Did the bookkeeper correctly record the client’s deposit? Explain your answer.
  2. 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.

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