The following are transactions of Albert Sing, an interior design consultant, for the

The following are transactions of Albert Sing, an interior design consultant, for the month of September 2011.

Sept. 1 Albert Sing begins business as an interior design consultant, investing $31,000 for 8,000 common shares of the company, A.S. Design Limited.

2 Purchased furniture and display equipment from Green Jacket Co. for $17,280.

4 Paid rent for office space for the next three months at $680 per month.

7 Employed a part-time secretary, Michael Bradley, at $300 per week.

8 Purchased office supplies on account from Mann Corp. for $1,142.

9 Received cash of $1,690 from clients for services performed.

10 Paid miscellaneous office expenses, $430.

14 Invoiced clients for consulting services, $5,120.

18 Paid Mann Corp. on account, $600.

19 Paid a dividend of $1.00 per share on the 5,000 outstanding shares.

20 Received $980 from clients on account.

21 Paid Michael Bradley two weeks of salary, $600.

28 Invoiced clients for consulting services, $2,110.

29 Paid the September telephone bill of $135 and miscellaneous office expenses of $85.

At September 30, the following information is available.

1. The furniture and display equipment has a useful life of five years and an estimated residual value of $1,500. Straight-line depreciation is appropriate.

2. One week’s salary is owing to Michael Bradley.

3. Office supplies of $825 remain on hand.

4. Two months of rent has been paid in advance.

5. The invoice for electricity for September of $195 has been received, but not paid.

Instructions

(a) Prepare journal entries to record the transaction entries for September. Set up a T account for the Cash account and post all cash transactions to the account. Determine the balance of cash at September 30, 2011.

(b) Prepare any required adjusting entries at September 30, 2011.

(c) Prepare an adjusted trial balance at September 30, 2011.

(d) Prepare a balance sheet and income statement for the month ended September 30, 2011.

(e) Prepare a statement of cash flows for the month of September 2011. Use the indirect method for the cash flows from operating activities.

(f) Recast the cash flow from operating activities section using the direct method.

(g) Compare the statement of cash flows in parts (e) and (f) with the Cash account prepared in part (a) above.

(h) As a creditor, what would you consider to be an alarming trend that is revealed by the statement of cash flows prepared using the indirect method as required in part (e) above? Is this trend as easy to notice when the statement is prepared using the direct method as required in part (f) above?

(a)

Sept.	1	Cash	31,000
		Common Shares..........................................................................................		31,000
	2	Furniture and Display Equipment........................................................................	17,280
		Cash............................................................................................................		17,280
	4	Prepaid Rent ($680 X 3)......................................................................................	2,040
		Cash............................................................................................................		2,040
	7	No entry
	8	Office Supplies....................................................................................................	1,142
		Accounts Payable.......................................................................................		1,142
	9	Cash	1,690
		Consulting Service Revenue.......................................................................		1,690
	10	Miscellaneous Office Expense.............................................................................	430
		Cash............................................................................................................		430
	14	Accounts Receivable............................................................................................	5,120
		Consulting Service Revenue.......................................................................		5,120
	18	Accounts Payable.................................................................................................	600
		Cash............................................................................................................		600
	19	Retained Earnings................................................................................................	5,000
		Cash (5,000 X $1.00).................................................................................		5,000
	20	Cash	980
		Accounts Receivable..................................................................................		980
	21	Office Salaries Expense.......................................................................................	600
		Cash............................................................................................................		600

Sept.	28	Accounts Receivable............................................................................................	2,110
		Consulting Service Revenue.......................................................................		2,110
	29	Utilities Expense..................................................................................................	135
		Miscellaneous Office Expense.............................................................................	85
		Cash............................................................................................................		220

	Cash
Sept. 1	31,000	Sept. 2	17,280
Sept. 9	1,690	Sept. 4	2,040
Sept. 20	980	Sept. 10	430
		Sept. 18	600
		Sept. 19	5,000
		Sept. 21	600
		Sept. 29	220
Bal. Sept. 30	7,500

(b)

Sept.	30	Depreciation Expense......................................................................................	263
		Accumulated Depreciation....................................................................		263
		($17,280 – $1,500) ÷ 5 X 1/12
	30	Office Salaries Expense..................................................................................	300
		Salaries Payable.....................................................................................		300
	30	Office Supplies Expense.................................................................................	317
		Office Supplies......................................................................................		317
		($1,142 – $825)
	30	Rent Expense..................................................................................................	680
		Prepaid Rent..........................................................................................		680
	30	Utilities Expense.............................................................................................	195
		Accounts Payable..................................................................................		195

 (c)

A.S. Design Limited
Adjusted Trial Balance
September 30, 2011
		Debit	Credit
	Cash	$7,500
	Accounts Receivable ($5,120 – $980 + $2,110)	6,250
	Office Supplies	825
	Prepaid Rent	1,360
	Furniture and Display Equipment	17,280
	Accumulated Depreciation		$263
	Accounts Payable ($1,142 – $600 + $195)		737
	Salaries Payable		300
	Common Shares		31,000
	Retained Earnings	5,000
	Consulting Service Revenue		8,920
	Rent Expense	680
	Office Supplies Expense	317
	Office Salaries Expense ($600 + $300)	900
	Utilities Expense ($135 + $195)	330
	Miscellaneous Office Expense ($430 + $85)	515
	Depreciation Expense	263
		$41,220	$41,220

(d)

A. S. Design Limited
Income Statement
For the Month Ended September 30, 2011
Consulting service revenue		$8,920
Expenses:
Rent expense	$  680
Office supplies expense	317
Office salaries expense	900
Depreciation expense	263
Utilities expense	330
Miscellaneous office expense	515
Total expenses		3,005
Net Income		$5,915

A. S. Design Limited
Balance Sheet
As at September 30, 2011
Assets
Cash	$ 7,500
Accounts receivable	6,250
Office supplies	825
Prepaid rent	1,360
Current assets	15,935
Furniture and display equipment	17,280
Accumulated depreciation	263
	17,017
Total assets	$32,952
Liabilities
Accounts payable	$     737
Salaries payable	300
Total liabilities	1,037
Shareholder’s Equity
Common shares	31,000
Retained earnings	915
Total shareholder’s equity	31,915
Total liabilities and shareholder’s equity	$32,952

 (e)

A. S. Design Limited
Statement of Cash Flows
For the Month Ended September 30, 2011
(Indirect Method)
Cash flows from operating activities
Net income				$5,915
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense	$263
Increase in accounts receivable	(6,250)
Increase in office supplies	(825)
Increase in prepaid rent	(1,360)
Increase in accounts payable	737
Increase in salaries payable	300			(7,135)
Net cash used in operating activities				(1,220)
Cash flows from investing activities
Purchase of furniture and display equipment				(17,280)
Cash flows from financing activities
Issuance of common shares	31,000
Payment of cash dividends	(5,000)
Net cash provided by financing activities		26,000
Net increase in cash		7,500
Cash, September 1, 2011		0
Cash, September 30, 2011		$7,500

 (f)

A. S. Design Limited
Statement of Cash Flows – Partial
For the Month Ended September 30, 2011
(Direct Method)
Cash flows from operating activities
Cash received from customers (1)		$2,670
Less: Cash paid to suppliers for goods
and services (2)	$3,290
Cash paid for salaries	600	3,890
Net cash used in operating activities		$(1,220)

Computations:
(1)	Cash received from customers
	Consulting services revenue			$8,920
	Less: Increase in accounts receivable			(6,250)
	Cash received from customers			$2,670

(2)	Cash paid to suppliers for goods and services
	Total expenses			$3,005
	Less: Depreciation expense			(263)
	Less: Office salaries expense			(900)
				1,842
	Less: Increase in accounts payable			(737)
	Add: Increase in office supplies			825
	Add: Increase in prepaid rent			1,360
	Paid to suppliers for goods and services			$3,290

(g)     The statement of cash flow balance at September 30, 2011 corresponds to the balance at September 30, 2011 for the cash account, arrived at in part (a) to the exercise. The operating activities section using the direct format in (f) more closely resembles the activity in the cash account as the amounts of the entries correspond (when aggregated) to the amounts appearing as increases and decreases in the cash account.

(h)     There is an alarming trend that is flagged by the indirect format of the statement of cash flows prepared in part (e) above, namely that operating cash flows are well below net income levels. Typically, the amount of net cash provided by operating activities exceeds the amount for net income. This is mainly due to the adjustment to income for non-cash items for expenses such as depreciation. In the case of A. S. Design Limited, increases in its accounts receivable and prepaid rent exceed the amount of the income. Prepaid rent does not represent a potential collection risk but accounts receivable certainly do. The direct format of the statement of cash flows does not highlight this issue, although the trends could be noticed from a comparison of balances taken from the balance sheet.