3M Accounting
Case Study

 

Why Doesn't Net Income Equal Cash?

Your friend Andrea is looking at purchasing a small business and has come to you for help. Andrea thinks that there might be some errors in the financial statements, and she wants you to take a look at them.

Andrea is wondering how the business' cash account could be less than it's net income for the past month.

Analyze the financial statements presented below, and then answer the questions that follow:


Student Internet Service
Income Statement
For the Month Ended November 31, 2001

Revenue
Service Fees Earned

$4,000.00

Expenses
Line Expense$1,000.00
Salary Expense1,900.00
Hydro100.00
Total Expenses3,000.00
Net Income1,000.00
=======


Student Internet Service
Balance Sheet
As at November 31, 2001

Assets
Liabilities
Cash$250.00
    Bank Loan
$2,500.00
Accounts Receivable1,500.00
    Accounts Payable
500.00
Equipment2,500.00_______
Furniture750.00
    Total Liabilities
3,000.00
Owner's Equity
    Capital
$1,200.00
    Add: Net Income
1,000.00
_______
2,200.00
    Less: Drawings
200.00
_______
    Total Owner's Equity
2,000.00
______________
Total Assets$5,000.00Total L & O.E.$5,000.00
==============


1. Does the balance of the Cash account necessarily need to be the same as the period's Net Income?

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2. If the cash account isn't equal to Net Income, then where might the Net Income have gone? (In other words, if our equity increased by $1,000.00, then where else might this increase in equity be represented within the balance sheet?)

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