Reference no: EM131774537

Problem - The following event occurred at Handsome Hounds Grooming Company during its first 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 first 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 $2000 refundable deposit. The first 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 10 years. The company paid 20% down 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 first 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 first year.

Required:

1. Prepare an income statement for the first year.

2. Prepare a Statement of Cash Flows for the first year using the direct method in the Operating Activities section.

3. Did the company generate more or less cash flow 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 first year.