Adjusting Entries
Transaction
A
General Journal
Deferred Service Revenue ($4,200*2/12)
Debit
Credit
$700
Service Revenue
$700
(To record revenue recognized)
B
Accounts Receivable
Service Revenue
$2,000
$2,000
(To record Accrued Service Revenue)
Adjusting Entries are prepared at the end of the year to update the balance of
various accounts

Explanationfor step 1
Revenue earned during the period is recognized by debiting deferred service
revenue and crediting revenue account.
Adjusting Entries are prepared at the end of the year to update the balance of
various accounts
Revenue earned during the period is recognized by debiting deferred service
revenue and crediting revenue account.
Income Statement (before tax)
Revenues:
Supplies Expense
$904,000
Other Revenue
$114,100 $1,018,100
Expenses:
Cost of Service Expense
$183,600
Supplies Expense
$336,200
Depreciation Expense
$57,750
Rent Expense
$30,500
Administrative & General Expens
e
$64,300
Profits before tax
$672,350
$345,750
W.N.2: Calculation of the Income Tax Expense:
Income Tax Expense=$345,750×40%=$138,300.00
W.N.3: Calculation of the Net Income
Net Income=$345,750−$138,300=$207,450

Explanationfor step 1
Net Income = Profits before tax - Income Tax Expense
For Accounts receivable.:
Letter "A" on credit side of accounts receivable T-account represents cash
collection from credit customer.Accounts receivable is an asset account and it is
debited when credit sales made and credited when cash is collected from
customer.
cash collection from cutomer=beginning balance +credit sales−ending balance=313+2,5
73−295=2,591
Step 2/3
For prepaid insurance:
Letter "B" on debit side of prepaid insurance T-accounts represents purchase of
insurance policy because purchase of insurance increases prepaid insurance
balance. Prepaid insurance is an asset account and it is debited when insurance
is purchased and credited when insurance is used.
purchase of insurance=beginning balance + expired portion of prepaid insurance−endin
g balance=25+42−26=41
Step 3/3
For deferred revenue"
Letter "C" on credit side deferred revenue T-account represents cash received for
services to be provided in future. Deferred revenue is a liability account and it
increases when advance cash received and debited when services performed in
later date.
Kitchen Gadgets Company Various accounts items amount are determined below:
Accounts items name
A Accounts receivable : 2020
Amount
$36000
B Inventories : 2020
$90000
C Depreciation expense : 2020 $15000
D Income taxes : 2020
$17000
E Change in prepaid expenses ($500)
F Change in accrued liabilities ($2000)
G
Net cash provided by operati
$45000
ng activities
H Additional capital
I
$25000
Payments of cash dividends ($10000)
Net cash used for financial ac
($5000)
tivities
Formula:
J
A)
Accounts receivable=Previous year amount + changes in accounts receivable=$32,
000+$4,000=$36,000
B)
Inventories=Previous year amount + Changes in inventories=$70,000+$20,000=$90
,000
EXPLANATION
Change in accounts receivable and inventories are given negative in the cash flow
statement, only increase amount will be given negative, so both accounts items amount
are added to previous year account balance.
C)
EXPLANATION
Depreciation expense amount given in cash flow statement
D) Income tax
Formula:
Income taxes=Total expenses − Cost of goods sold − Selling and Adminstration ex
penses − Depreciation expense −Interest expense =$425,000−$290,000−$94,000−$15
,000−$9,000=$17,000
E)
Formula
Changes in prepaid expenses =Previous year prepaid rent − Current year prepaid
rent=$2,000−$2,500=$−500
EXPLANATION
Current asset increased then difference amount will need to shown negative in cash
flow statement
F)
Formula:
Changes in accrued liabilities=Current year accrued liabilties − Previous year accru
ed liabilities=$10,000−$12,000=$−2,000
EXPLANATION
Current liabilities decreased then difference amount will need to shown negative in cash
flow statement.
G)
Formula:
Net cash provided by operating activities=Net income +Depreciation expense − Ch
ange in inventories − Change in prepaid expenses − change in accrued liabilities − c
hanges in accounts receivable+Changes in accounts payable=$52,500+$15,000−20
,000−$500−$2,000−$4,000+$4,000=$45,000
H)
Formula:
Additional capital contributed by share holders=Current year contributed capital − Pr
evious year contributed capital=$50,000−$25,000=$25,000
I)
Formula
Payments of cash dividends=Beginning retained earnings +Net income − Ending ret
ained earnings=$71,000+$52,500−$113,500=$10,000
EXPLANATION
Cash dividends paid will reduce cash account balance of the company, so it has shown
negative in cash flow statement.
J)
Formula:
Net cash used for financial activites=Additional capital contribution −Payment of pri
ncipal on notes − payment of cash dividends=$25,000−20,000−$10,000=$−5,000
EXPLANATION
If cash paid excess of cash received under financial activities then it has to mention
cash used for financial activities.
Calculation of the Profits before the Income Tax expense
Income Statement (before tax)
Revenues:
Supplies Expense
$904,000
Other Revenue
$114,100 $1,018,100
Expenses:
Cost of Service Expense
$183,600
Supplies Expense
$336,200
Depreciation Expense
$57,750
Rent Expense
$30,500
Administrative & General Expens
e
$64,300
$672,350
Profits before tax
$345,750
W.N.2: Calculation of the Income Tax Expense:
Income Tax Expense=$345,750×40%=$138,300.00
W.N.3: Calculation of the Net Income
Net Income=$345,750−$138,300=$207,450

Explanationfor step 1
Net Income = Profits before tax - Income Tax Expense
Final answer
A. Income before income tax: $345,750
B: Income Tax owed by the company: $138,800
C: Net Income: $207,450
D: Adjusted Trial Balance
Adjusted Trial Balance
Account Titles
Debit
Credit
Cash
$351,340
Accounts Receivable
$607,550
Prepaid Insurance
Prepaid Rent
Interest Receivable
$6,800
$11,200
$4,300
Supplies Inventory
$216,900
Investments
$146,400
Property & Equipment
$672,500
Accumulated Depreciation
$128,900
Accrued Liabilities
$23,400
Income Tax Payable
$138,300
Accounts Payable
$281,700
Deferred Revenue
$83,600
Notes Payable
$356,040
Bonds Payable
$229,600
Contributed Capital
$380,600
Retained Earnings
$187,400
Service Revenue
$904,000
Other Revenue
$114,100
Cost of Service Expense
$183,600
Supplies Expense
$336,200
Depreciation Expense
$57,750
Rent Expense
$30,500
Administrative & General Expens
es
$64,300
Income Tax Expense
Total
$138,300
$2,827,640
$2,827,640
E: Income Statement
Income Statement
Revenues:
Supplies Expense
$904,000
Other Revenue
$114,100 $1,018,100
Expenses:
Cost of Service Expense
$183,600
Supplies Expense
$336,200
Depreciation Expense
$57,750
Rent Expense
$30,500
Administrative & General Expens
e
$64,300
$672,350
Profits before tax
$345,750
Less: Tax Expense
(138300)
Net Income
$207,450
he financial information below presents operating revenue and expenses for 2020 as
well as the starting and ending balances for relevant asset and liability accounts that
changed during the year:
Sales revenue
Cost of goods sold
Interest expense
Accounts receivable
12/31/19
Accounts payable
12/31/19
Prepaid expenses
12/31/19
Inventory 12/31/19
$909,272 Depreciation expense
445,563 Selling, general and administrative
expenses
12,402 Income tax expense
65,305 Accounts receivable 12/31/20
$3,206
91,316
16,540
Accounts payable 12/31/20
17,261
4,107
Prepaid expenses 12/31/20
3,875
7,852
Inventory 12/31/20
6,491
143,126
67,810
Prepare the Operating section of the Cash Flow Statement using the indirect approach.
Net income = Sales - cost of goods sold - depreciation expense - selling, general and
administrative expense - interest expense - income tax expense
Net income = $909,272 - $445,563 - $3,206 - $91,316 - $12,402 - $143,126
Net income = $463,709 - $3,206 - $91,316 - $12,402 - $143,126
Net income = $460,503 - $91,316 - $12,402 - $143,126
Net income = $369,187 - $12,402 - $143,126
Net income = $356,785 - $143,126
Net income = $213,659
Step 2/3
Calculating the increase or decrease in the current assets and current liabilities.

Explanationfor step 2
Formula:
Increase or decrease in current assets or current liabilities = Value in 2020 - value in
2019
1) The accounts receivable at the end of 2020 is greater than the accounts receivable at
the end of 2019
So, increase in accounts receivable = $67,810 - $65,305 = $2,505
2) The accounts payable at the end of 2020 is greater than the accounts payable at the
end of 2019
So, increase in accounts payable = $17,261 - $16,540 = $722
3) The prepaid expenses at the end of 2020 is less than the prepaid expenses at the
end of 2019.
So, decrease in prepaid expenses = $3,875 - $4,107 = $232
4) The inventory at the end of 2020 is less than the inventory at the end of 2019.
So, decrease in inventory = $6,491 - $7,852 = $1,361
Step 3/3
Calculating the net cash provided by operating activities.

Explanationfor step 3
Net income + depreciation expense - increase in accounts receivable + decrease in
prepaid expense + decrease in inventory + increase in accounts payable = Net cash
provided by operating activities
$213,659 + $3,206 - $2,505 + $232 + $1,361 + $722 = Net cash provided by operating
activities
$216,865 - $2,505 + $232 + $1,361 + $722 = Net cash provided by operating activities
$214,360 + $232 + $1,361 + $722 = Net cash provided by operating activities
$214,592 + $1,361 + $722 = Net cash provided by operating activities
$215,953 + $722 = Net cash provided by operating activities
$216,675 = Net cash provided by operating activities
Note:
- Increase in current assets should be deducted and decrease in current assets must be
added to the net income.
- Increase in current liabilities should be added and decrease in current liabilities must
be deducted from the net income.
Final answer
Answer:-
Cash flow fr
om operatin
g activities:
Net income
$213,659
Adjustments t
o reconcile n
et income to
net cash prov
ided by opera
ting activities:
Depreciation 3,206
Changes in c
urrent assets
and current li
abilities:
Increase in a
ccounts recei (2,505)
vable
Decrease in
prepaid expe
nses
232
Decrease in i
1,361
nventory
Increase in a
ccounts paya
ble
722
Net cash pro
vided by ope
$216,675
rating activit
ies
Note: Refer steps 1, 2 and 3 for calculations.
Compute net cash inflows (outflows) from investing and financing activities :Statement of Cash Flow
Cash Flow from investing activities
Sale of Property, Plant & Equipment (850,000 - 8
25,000
25,000)
Net cash inflows from Investing Activities
25,000
Cash Flow from financing activities:
Payment of dividends
(150,000)
Payment of shortterm notes payable (237000-187
(50,000)
000)
Issuance of common Stock (480,000 - 400,000)
80,000
Issuance of Bonds Payable (500,000 - 350,000)
150,000
Net Cash inflows from financing activities.

30,000
Explanationfor step 1
An increase in the short term notes receivable does not impact the cash flow statement
unless it is accompanied with a cash outflow due to a credit issuance.
An increase in the bonds receivable does not impact the cash flow statement .
a. Statement of Cash Flows for Lemon Zester Company for the year ended December
31, 2020 using the indirect method:
Lemon Zester Company Statement of Cash Flows (Indirect Method) For the Year
Ended December 31, 2020
Cash flows from operating activities: Net income $5,500 Adjustments to reconcile net
income to net cash provided by operating activities: Depreciation expense $3,000
Increase in accounts receivable ($5,000 - $0) ($5,000) Increase in accounts payable
($5,500 - $10,000) ($4,500) Increase in accrued expenses ($0 - $500) ($500) Net cash
provided by operating activities $3,500
Cash flows from investing activities: Purchase of land ($10,000) Sale of land $5,000 Net
cash used in investing activities ($5,000)
Cash flows from financing activities: Issuance of common stock $10,000 Payment of
long-term note payable principal ($1,000) Payment of long-term note payable interest
($1,000) Payment of dividends ($1,000) Net cash provided by financing activities $7,000
Net increase in cash $5,500 Cash balance, January 1, 2020 $10,000 Cash balance,
December 31, 2020 $15,500
Step 2/2
b. Statement of Cash Flows for Lemon Zester Company for the year ended December
31, 2020 using the direct method:
Lemon Zester Company Statement of Cash Flows (Direct Method) For the Year Ended
December 31, 2020
Cash flows from operating activities: Cash received from customers $8,000 Cash paid
for wages ($3,000) Cash paid for interest ($1,000) Cash paid for other expenses ($500)
Net cash provided by operating activities $3,500
Cash flows from investing activities: Purchase of land ($10,000) Sale of land $5,000 Net
cash used in investing activities ($5,000)
Cash flows from financing activities: Issuance of common stock $10,000 Payment of
long-term note payable principal ($1,000) Payment of long-term note payable interest
($1,000) Payment of dividends ($1,000) Net cash provided by financing activities $7,000
Net increase in cash $5,500 Cash balance, January 1, 2020 $10,000 Cash balance,
December 31, 2020 $15,500
Final answer
c. Interpretation:
The Statement of Cash Flows shows that Lemon Zester Company had a net increase in
cash of $5,500 during the year ended December 31, 2020. The main sources of cash
were from the issuance of common stock and cash received from customers. The main
uses of cash were the purchase of new land, the payment of the long-term note payable
and interest, and the payment of dividends. The company also paid off some of its
accounts payable and incurred other expenses on account, which reduced its operating
cash flow. Overall, the company was able to increase its cash balance from $10,000 at
the beginning of the year to $15,500 at the end of the year, which indicates a healthy
financial position.
_ Operating activities: N, F _____ Indirect method: B _____ Cash equivalent: C _____
Investing activities: K _____ Direct method: F _____ Financing activities: E, M
A. Measures the percent of net income that comes from high-margin products. (This
description does not match any of the terms listed.)
B. Includes such events as the receipt of dividends and interest on investment assets.
Indirect method
C. Includes assets that are very liquid and have original maturities of three months or
less. Cash equivalent
D. The percent of total debt represented by a company's cash account. (This description
does not match any of the terms listed.)
E. These activities include only purchases made with borrowed funds. Financing
activities
F. Where cash flows from operating activities are calculated by converting each revenue
and expense item from an accrual to a cash basis. Direct method, N, F
G. This ratio multiplies net income by the average rate of interest the company receives
on its investments. (This description does not match any of the terms listed.)
H. This ratio uses net income instead of operating cash flow to Analysis a company's
ability to finance the cost of its debt. (This description does not match any of the terms
listed.)
I. Measures the ability of a company to finance its interest payments with its operating
cash flow before taxes and interest. (This description does not match any of the terms
listed.)
J. These activities include money lent by a company as well as money borrowed by a
company. Investing activities, Financing activities
K. The purchases and sales of investment assets. Investing activities
L. Measures the proportion of property, plant, and equipment a company replaces in an
accounting period. (This description does not match any of the terms listed.)
M. These activities include changes in a company's debt or its shareholders' equity
accounts. Financing activities
N. Where cash flows from operating activities are calculated by making adjustments to
net income. Indirect method
EXPLANATION












Operating activities: These activities include the day-to-day operations that
generate revenue and expenses, such as sales and payroll.
Indirect method: Where cash flows from operating activities are calculated by
making adjustments to net income.
Cash equivalent: Includes assets that are very liquid and have original
maturities of three months or less.
Investing activities: The purchases and sales of investment assets.
Direct method: Where cash flows from operating activities are calculated by
converting each revenue and expense item from an accrual to a cash basis.
Financing activities: These activities include changes in a company's debt or
its shareholders' equity accounts.
Return on investment: This ratio multiplies net income by the average rate of
interest the company receives on its investments.
Debt to cash ratio: The percent of total debt represented by a company's cash
account.
Times interest earned: Measures the ability of a company to finance its
interest payments with its operating cash flow before taxes and interest.
Debt to equity ratio: This ratio uses net income instead of operating cash flow
to analyze a company's ability to finance the cost of its debt.
Borrowed funds: These activities include only purchases made with borrowed
funds.
Capital expenditures ratio: Measures the proportion of property, plant, and
equipment a company replaces in an accounting period.