Accounts

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Decision Case 3-4 Making Financial Decisions

Cash Flow versus Net Income

Shelia Young started a real estate business at the beginning of January. After approval by the state for a charter to incorporate, she issued 1,000 shares of stock to herself and deposited $20,000 in a bank account under the name Young Properties. Because business was booming, she spent all of her time during the first month selling properties rather than keeping financial records. At the end of January, Sheila comes to you with the following plight:

I put $20,000 in to start this business at the beginning of the month. My January 31 bank statement shows a balance of $17,000. After all of my efforts, it appears as if I’m “in the hole” already! On the other hand, that seems impossible- we sold five properties for clients during the month. Total sales value of these properties was $600,000 and I received a commission of 5% on each sale. Granted, one of the five sellers still owes me $8,000 commission, but the other four have been collected in full. Three of the sales value of a property. Sure, I have a few office expenses for my car, utilities, and a secretary; but that’s about it. How can I have possible lost $3,000 this month?

You agree to help Shelia figure out how she did this month. The bank statement is helpful. The total deposits during the month amount to $22, 000. Shelia explains that this amount represents the commissions on the four sales collected so far. The canceled checks reveal the following expenditures.

Check No. Payee-Memo at Bottom of Check Amount

101 Stevens Office Supply $2,000

102 Why Walk, Let’s Talk Motor Co.-new car 3,000

103 City of Westbrook-heat and light...