I'm having problems figuring out a question for my accounting class. Can anyone help me with it? Thanks
Patty Piper recently began a swimming pool chlorination service. She visits each of her clients on a weekly basis and applies chlorine gas and other chemicals to their pools. This service in not only convenient for her clientele but is actually less costly than if the customers performed the process themselves.
Piper started her business on April 1 with a beginning cash investment of $3,500. Through various contacts, she was able to establish an initial client base of 40 customers. Customers are billed when serviced and settle their accounts in the following month. Piper charges each client $30 monthly, thereby generating a 100% markup on the $15 cost of chlorine and other supplies used. Other business expenses (gasoline, telephone, etc.) total $100 monthly and are paid when incurred.
All chemicals and supplies are purchased and paid for at the beginning of each month, the amounts acquired being based on the number of customers to be serviced. On April 1, for instance, purchases totaled $600 (40 customers x $15 each).
Piper’s business has grown rapidly, as evidenced by the following data:
Customers
Month Serviced
April 40
May 80
June 160
It has become apparent that the customer base would total 320 for July.
On July 1, Piper approached you about a cash flow problem. She is unable to buy the necessary chemicals and supplies because of a lack of cash. Patty is also quite confused because a friend of hers, an accountant, has prepared monthly accrual-based financial statements that reveal the business is operating at a profit. Patty is now questioning these statements in view of the firm’s present cash position.
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