During his second year in college, Wesley Smith inherited Strongarm Moving Service when his father died. He immediately dropped out of school and took over management of the business. At the time he took over, Wesley recognized he knew little about accounting. However, he reasoned that since the business performed its services strictly for cash, if the cash of the business increased, the business was doing OK. Therefore, he was pleased as he watched the cash balance grow from \(\$ 2,100\) when he took over to \(\$ 25,715\) at year-end. Furthermore, since he had withdrawn \(\$ 30,000\) from the business to buy a new car and to pay personal expenses, he reasoned that the business must have earned \(\$ 53,615\) during the year. He arrived at the \(\$ 53,615\) by adding the \(\$ 23,615\) increase in cash to the \(\$ 30,000\) he had withdrawn from the business. Wesley was shocked when he received the income statement that follows and learned that the business had earned less than the amounts withdrawn.

After thinking about the statement for several days, Wesley asked you to explain how, in a year in which the cash increased \(\$ 23,615\) and he withdrew \(\$ 30,000\), the business earned only \(\$ 35,335\). In examining the accounts of the business, you note that accrued salaries and wages payable at the beginning of the year were \(\$ 185\) but increased to \(\$ 575\) at year's end. Also, the accrued taxes payable were \(\$ 675\) at the beginning of the year but had increased to \(\$ 715\) at year-end. Also, the balance of the Prepaid Insurance account was \(\$ 300\) less and the balance of the Office Supplies account was \(\$ 75\) less at the end of the year than at the beginning. However, except for the changes in these accounts, the change in cash, and the changes in the balances of the accumulated depreciation accounts, there were no other changes in the balances of the concern's asset and liability accounts between the beginning of the year and the end. Back your explanation with a calculation that accounts for the increase in the business's cash.

Transcribed Image Text:

STRONGARM MOVING SERVICE Income Statement For Year Ended December 31, 1990 Revenue from moving services. $120,565 Operating expenses: Salaries and wages expense. $54,825 Gas, oil, and repairs expense 4,835 Telephone expense. 525 Taxes expense. 3,710 Insurance expense. 3,485 Office supplies expense. 375 Depreciation expense, office equipment. 600 Depreciation expense, trucks. 9.375 Depreciation expense, building. 7,500 Total operating expenses Net income. 85,230 $ 35,335