The text states, "Over sufficiently long time periods, net income equals cash inflows minus cash outflows,...

90.2K

Verified Solution

Question

Accounting

The text states, "Over sufficiently long time periods, netincome equals cash inflows minus cash outflows, other than cashflows with owners." Demonstrate the accuracy of this statement inthe following scenario: Two friends contributed $50,000 each toform a new business. The owners used the amounts contributed topurchase a machine for $100,000 cash. They estimated that theuseful life of the machine was five years and the salvage value was$20,000. They rented out the machine to a customer for an annualrental of $25,000 a year for five years. Annual cash operatingcosts for insurance, taxes, and other items totaled $6,000annually. At the end of the fifth year, the owners sold theequipment for $22,000, instead of the $20,000 salvage valueinitially estimated. (Hint: Compute the total net income and thetotal cash flows other than cash flows with owners for thefive-year period as a whole.)
CASH EQUIPMENT COMMON STOCK NET INCOME
cash contributed by owners
purchase of machine for cash
recognition of rent revenue
recognition of operating expenses
recognition of depreciation
sale of machine
totals $ $ $ $

Answer & Explanation Solved by verified expert

4.0 Ratings (626 Votes)

Computation of annual income flow and cash flow as below Computation of annual depreciation Depreciation Cost of AssetSalvage Valueuseful life of asset 100000200005 16000 Computation of profit from sale of asset at the end of See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

The text states, "Over sufficiently long time periods, netincome equals cash inflows minus cash outflows, other than cashflows with owners." Demonstrate the accuracy of this statement inthe following scenario: Two friends contributed $50,000 each toform a new business. The owners used the amounts contributed topurchase a machine for $100,000 cash. They estimated that theuseful life of the machine was five years and the salvage value was$20,000. They rented out the machine to a customer for an annualrental of $25,000 a year for five years. Annual cash operatingcosts for insurance, taxes, and other items totaled $6,000annually. At the end of the fifth year, the owners sold theequipment for $22,000, instead of the $20,000 salvage valueinitially estimated. (Hint: Compute the total net income and thetotal cash flows other than cash flows with owners for thefive-year period as a whole.)CASHEQUIPMENTCOMMON STOCKNET INCOMEcash contributed by ownerspurchase of machine for cashrecognition of rent revenuerecognition of operating expensesrecognition of depreciationsale of machinetotals $ $ $ $

	CASH	EQUIPMENT	COMMON STOCK	NET INCOME
cash contributed by owners
purchase of machine for cash
recognition of rent revenue
recognition of operating expenses
recognition of depreciation
sale of machine