Need help with solving net operating cash flow

[straightmarble02]

I need explanation about how the process of calculation of net operating cash flow in the answer. I'm confused solving this question. Can somebody help me please?

Listed below are several transactions that took place during the first two years of operations for the law firm of Pete, Pete, and Roy.

Year 1 Year 2
Amounts billed to customers for services rendered............................... $170,000 $220,000
Cash collected from customers..................................................................... 160,000 190,000
Cash disbursements:..................................................................................
Salaries paid to employees for services rendered during the year ............ 90,000 100,000
Utilities ........................................................................................................ 30,000 40,000
Purchase of insurance policy ...................................................................... 60,000 –0–

In addition, you learn that the company incurred utility costs of $35,000 in year one, that there were no liabilities at the end of year two, no anticipated bad debts on receivables, and that the insurance policy covers a three-year period.

Required: Calculate the net operating cash flow for years 1 and 2.


Answer
year 1
Cash collected from customers 160,000
(-) Salaries paid to employees for services rendered during the year 90,000
(-) Utilities 30,000
(-) Purchase of insurance policy 60,000
------------------------------------------
(=) net operating cash flow -20,000

year 2
Cash collected from customers 190,000
(-) Salaries paid to employees for services rendered during the year 100,000
(-) Utilities 40,000
(-) Purchase of insurance policy 0
------------------------------------------
(=) net operating cash flow 50,000


Why $35,000 in year one is not included in the expenses of year 1? It's stated, "In addition, you learn that the company incurred utility costs of $35,000 in year one".

And I thought I should divided the purchase of insurance policy $60,000 by 3 year period, and account for $20,000 in each year 1, year 2. But the answer I got from a person account for $60,000 at once in year 1, and zero expense of insurance policy in year 2.

 

[Triest123]

Because the answer is using the "direct method" to prepare the cash flow statement.
Pls study your textbook about the direct method

 

[straightmarble02]

my typo in #1 *I need explanation about the process of calculation of net operating cash flow in the answer.

I understand now why I couldn't understand the process how the net operating cash flow is calculated. I didn't fully understand the difference between cash basis accounting and accrual accounting model.

Net operating cash flow is a measure in the cash basis accounting. This measure is the difference between cash receipts and cash payments(or cash disbursements) from transactions related to providing goods and services to customers during a reporting period.

On the other hand, net income in the accrual accounting model doesn't focus only on cash flows because the accrual basis accounting also reflects other resources provided and consumed by operations during a period as well as cash flows. Net income is the difference between revenues and expenses.

I misunderstood expenses in the accrual accounting is the same as cash disbursements in the cash basis accounting, which is mostly not the case.
The incurred utility costs of $35,000 itself in year one is not a cash disbursement, but an expense, and utilities costs paid are on the transactions that took place. So the actual cash outflows—30,000 in yr 1 and 40,000 in yr 23—should only be considered in cash disbursements in order to calculate the net operating cash flow.

Thank you Triest123, I'll also review direct method again.

 

[Littlestitcher46]

I am having a problem with the same question except I am having difficulty figuring out the utility cost for year 2 while I am preparing the income statements for both years. I don’t know what to do with the additional information about the 35,000 utility bill?
Since it tells me that there is no liabilities at the end of year 2 should I add the 35,000 to the 40,000 to have a total on income statement for year 2 of 75,000?
I believe it should be 40,000 for year 2 accrual method but it says I am incorrect
Thank you

 

[Fidget]

The original question on this thread is about a cash flow statement rather than an income statement. So it's difficult to help without seeing the question you're trying to answer.