Income Statement, Statement of Cash Flows (Direct Method), and Balance Sheet The following events occurred at Handsome Hounds Grooming Company during its fi rst year of business:

a. To establish the company, the two owners contributed a total of $50,000 in exchange for common stock.

b. Grooming service revenue for the fi rst year amounted to $150,000, of which

$40,000 was on account.

c. Customers owe $10,000 at the end of the year from the services provided on account.

d. At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for $12,000 per year and make a $2,000 refundable security deposit. The fi rst year’s lease payment and the security deposit were paid at the beginning of the year.

e. At the beginning of the year, the company purchased a patent at a cost of $100,000 for a revolutionary system to be used for dog grooming. The patent is expected to be useful for ten years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder.

f. Operating expenses, including amortization of the patent and rent on the storage building, totaled $80,000 for the fi rst year. No expenses were accrued or unpaid at the end of the year.

g. The company declared and paid a $20,000 cash dividend at the end of the fi rst year.

Required 1. Prepare an income statement for the fi rst year.

2. Prepare a statement of cash fl ows for the fi rst year using the direct method in the Operating Activities section.

3. Did the company generate more or less cash fl ow from operations than it earned in net income? Explain why there is a difference.

4. Prepare a balance sheet as of the end of the fi rst year.

AppendixLO1