Applying Matching Concept Tom Driver decided to retire from stock car racing and invest all his winnings in a fish farm. He had majored in genetics in college and experimented with many different species of fish before coming up with a catfish that has the texture and taste of ocean trout.

Moreover, contacts from his previous profession made it pos sible for him to acquire feed for his unique form of fish at very low prices. In December 2000, Tom decided to explore expansion possibilities. He talked with his banker about getting a loan and presented an income statement for 2000, based strictly on cash flows, as follows:

From discussions with Tom, the banker learned the following:
* $180,000 of the cash collected in 2000 was from shipments delivered prior to the start of the year. Payment for all the sales this year were collected prior to year-end.
* The feed can be stored indefinitely, and about half of 2000’s purchases remain on hand at year-end.
* Two fish tanks were purchased in 1999 at a total cost of $100,000. These tanks, along with the one purchased at the beginning of 2000, were used all year. Each tank is expected to last five years.
* The land sold for $100,000 had been purchased in 1998 for $60,000.
Provide Tom and his banker with responses to each of the following:

a. Why is the matching concept important in this case?

b. What amount of revenue from the sale of merchandise should be included in 2000?

c. What amount of expense for fish food should be reported in 2000? How should the remainder of the food purchased be reported?

d. Should some amount for the fish tanks be included in computing income for 2000? How much?

e. What amount of gain on the sale of land should be included in income for 2000?

f. Should Tom stay in the fish business or go back to auto racing? What factors other than the income computations would be relevant to evaluating the potential future for Tom’s fish farm?

Transcribed Image Text:

Cash collected from sale of Tom's Gourmet Fish $510,000 Less: Feed purchases $420,000 Purchase of new fish tank 50.000 Wage expense 75,000 Operating loss Plus: Sale of land Net income 545,000 $ (35,000) 100,000 $ 65,000