The following events were completed by Dana’s Imports in September 2018: Sept. 1 Acquired $50,000 cash from the issue of common stock.
1 Purchased $28,000 of merchandise on account with terms 2/10, n/30.
5 Paid $600 cash for freight to obtain merchandise purchased on September 1.
8 Sold merchandise that cost $15,000 to customers for $31,000 on account, with terms 2/10, n/30.
8 Returned $600 of defective merchandise from the September 1 purchase to the supplier.
10 Paid cash for the balance due on the merchandise purchased on September 1.
20 Received cash from customers of September 8 sale in settlement of the account balances, but not within the discount period.
30 Paid $2,450 cash for selling expenses.
Required
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a. Record each event in a statements model like the following one. The first event is recorded as an example.
b. Prepare an income statement for the month ending September 30.
c. Prepare a statement of cash flows for the month ending September 30.
d. Explain why there is a difference between net income and cash flow from operating activities.
SOLUTION
a.
Dana’s Imports Effect of Transactions on Financial Statements Using Horizontal Statements Model
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Income Statement
Income Statement
Income Statement
Income Statement
Income Statement
Statement of
Date
Assets
Assets
Assets
Assets
Assets
=
Liab.
+
Stockholders’ Equity
Stockholders’ Equity
Stockholders’ Equity
Rev.
Exp.
=
Net Inc.
Cash Flows
Cash
+
Acc. Rec.
+
Inv.
=
Acct. Pay.
+
C. Stk.
+
Ret. Earn.
9/1
50,000
+
NA
+
NA
=
NA
+
50,000
+
NA
NA
NA
=
NA
50,000 FA
9/1
NA
+
NA
+
28,000
=
28,000
+
NA
+
NA
NA
NA
=
NA
NA
9/5
(600)
+
NA
+
600
=
NA
+
NA
+
NA
NA
NA
=
NA
(600) OA
9/8a.
NA
+
31,000
+
NA
=
NA
+
NA
+
31,000
31,000
NA
=
31,000
NA
9/8b.
NA
+
NA
+
(15,000)
=
NA
+
NA
+
(15,000)
NA
15,000
=
(15,000)
NA
9/8
NA
+
NA
+
(600)
=
(600)
+
NA
+
NA
NA
NA
=
NA
NA
9/101
(26,852)
+
NA
+
(548)
=
(27,400)
+
NA
+
NA
NA
NA
=
NA
(26,852) OA
9/20
31,000
+
(31,000)
+
NA
=
NA
+
NA
+
NA
NA
NA
=
NA
31,000 OA
9/30
(2,450)
+
NA
+
NA
=
NA
+
NA
+
(2,450)
NA
2,450
=
(2,450)
(2,450) OA
Tot.
51,098
+
-0-
+
12,452
=
-0-
+
50,000
+
13,550
31,000
17,450
=
13,550
51,098 NC
1($28,000 $600) = $27,400; $27,400 x .98 = $26,852 cash paid for inventory. Discount taken $27,400 x 2% = $548.
b. & c.
Dana's Imports Financial Statements For the Month Ended September 30, 2018
Income Statement
Net Sales
$31,000
$31,000
Cost of Goods Sold
(15,000)
(15,000)
Gross Margin
16,000
16,000
Operating Expenses
Selling and Adm. Expense
(2,450)
(2,450)
Net Income
$13,550
$13,550
Statement of Cash Flows
Cash Flows From Oper. Activities:
Inflow from Customers
$31,000
Outflow for Inventory*
(27,452)
Outflow for Selling and Adm. Exp.
(2,450)
Net Cash Flow from Operating Act.
$ 1,098
Cash Flows From Investing Activities
-0-
Cash Flows From Fin. Activities:
Inflow from Stock Issue
50,000
Net Cash Flow from Financing Act.
50,000
Net Change in Cash
51,098
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$51,098
*$26,852 + $600 = $27,452
d.
Net income is $13,550 and Cash Flow from Operating Activities is $1,098. Net income is based on income earned and expenses incurred not on cash received or collected. There was a payment of $27,452 for inventory purchased but only $15,000 was expensed as cost of goods sold.