Question

When Sara Yu’s father died suddenly, Sara had just completed the semester in college, so she stepped in to run the family business, AAA Couriers, until it could be sold. Under her father’s direction, the company was a successful operation and provided ample money to meet the family’s needs.
Sara was majoring in biology in college and knew little about business or accounting, but she was eager to do a good job of running the business so it would command a good selling price. Since all of the services performed were paid in cash, Sara figured that she would do all right as long as the Cash account increased. Thus, she was delighted to watch the cash balance increase from $24,800 at the beginning of the first month to $63,028 at the end of the second month—an increase of $38,228 during the two months she had been in charge. When she was presented an income statement for the two months by the company’s bookkeeper, she could not understand why it did not show that amount as income but instead reported only $21,100 as net income.
Knowing that you are taking an accounting class, Sara brings the income statement, shown below, to you and asks if you can help her understand the difference.


In addition, Sara permits you to examine the accounting records, which show that the balance of Salaries Payable was $2,680 at the beginning of the first month but had increased to $4,240 at the end of the second month. Most of the balance in the Insurance Expense account reflects monthly insurance payments covering only one month each. However, the Prepaid Insurance account had decreased $300 during the two months, and all supplies had been purchased before Sara took over.
The balances of the company’s other asset and liability accounts showed no changes.
1. Explain the cause of the difference between the increase in the Cash account balance and the net income for the two months.
2. Prepare a schedule that accounts for thisdifference.


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  • CreatedAugust 08, 2014
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