O'Hara Inc. made sales of $310,000 during 2008, it's first year of operations. Of this, $15,000 remained in accounts receivable at the end of the year. Additionally, the company paid and incurred $270,000 in expenses during the year. The company also prepaid $5,000 of its 2009 insurance and recorded $3,000 of depreciation expense in December 2008. What is the company's cash basis net income?
To determine the company's cash basis net income, we need to calculate the cash inflows and outflows related to the sales and expenses during the year.
First, let's calculate the cash inflow from sales:
Sales = $310,000
Accounts receivable at the end of the year = $15,000
Cash inflow from sales = Sales - Accounts receivable at the end = $310,000 - $15,000 = $295,000
Next, let's calculate the cash outflow from expenses:
Expenses incurred during the year = $270,000
Depreciation expense recorded in December 2008 = $3,000
Prepaid insurance for 2009 = $5,000
Cash outflow from expenses = Expenses incurred during the year + Depreciation expense + Prepaid insurance = $270,000 + $3,000 + $5,000 = $278,000
Now, we can calculate the cash basis net income:
Cash basis net income = Cash inflow from sales - Cash outflow from expenses = $295,000 - $278,000 = $17,000
Therefore, the company's cash basis net income for 2008 is $17,000.