Question

ROUGH w ant U my Constreu vuyung Digung uy CIOCONUTSTILSKIO WILOGO and experience will prove useful in running the business and have instead convinced him to become a shareholder of the new company rather than selling the business to them. Although W.T. and his aunt will both contribute cash to acquire their stock, Frank will contribute land and inventory. On January 1, 2018 their new business was formed. In January, CIC will only operate the wholesale portion of its business as it's too cold to generate much business by operating an ice cream truck (which is rented seasonally). For the wholesale portion of its business, CIC places orders with its manufacturer, stores its product (half gallons of ice cream) in cold storage (which it rents), and distributes its product to grocery stores through the delivery service offered by the cold storage facility. Because CIC pays its manufacturer actual costs to produce its product (rather than a fixed amount), prices do tend to fluctuate over time. W.T. is the only employee of CIC at this time and he will manage all aspects of the business. CIC applies the FIFO cost flow assumption to its inventory During January, the business experienced the following events. 1. Acquired $50,000 cash, $5,000 of inventory (1,250 units), and $20,000 of land from the issue of common stock 2. Purchased 1,000 units of ice cream at $4.50 each, on account. 3. Sold 1,500 units of ice cream at $8.00 each, on account. 4. Paid the storage and delivery bill for the month, $1,300. 5. Paid W.T. wages of $500. 6. Received $7,000 from customers on account. 7. Paid the manufacturer $3,000 of the amount owed. Required: a. Record these events in a horizontal statements model like the one on p. 5. An Excel template is also provided on Brightspace. b. Compute the amount of ending inventory CIC would report on the January balance sheet. C. Compute the gross margin CIC would report on its January income statement. d. Compute the net income CIC would report on its income statement. e. What is the balance in accounts receivable at the end of the month?

Answer 1

a. Horizontal Statement

CIC

Horizontal Statements Model for the month of January

Balance Sheet

Income Statement

Event No.

Assets

=

Liabilities

+

Stockholders' Equity

Revenue

-

Expenses

=

Net Income

Statement of Cash Flows

Land

Cash

+

Inventory

+

Accounts Receivable

=

Accounts Payable

+

Common Stock

+

Retained Earnings

-

=

Net Change

Description

1

$20,000

$50,000

+

$5,000

+

=

+

$75,000

+

-

=

$50,000

Cash flow from Financiang Activities

2

+

$4,500

+

=

$4,500

+

+

-

=

3

+

+

$12,000

=

+

+

$12,000

$12,000

-

=

$12,000

-

No Change

4

($1,300)

+

+

=

+

+

($1,300)

-

$1,300

=

($1,300)

($1,300)

Cash flow from Operating Activities

5

($500)

+

+

=

+

+

($500)

-

$500

=

($500)

($500)

Cash flow from Operating Activities

6

$7,000

+

+

($7,000)

=

+

+

-

=

$7,000

Cash flow from Operating Activities

7

($3,000)

+

+

=

($3,000)

+

+

-

=

($3,000)

Cash flow from Operating Activities

For Cost of Goods Sold

+

($6,125)

+

=

+

+

($6,125)

-

$6,125

=

($6,125)

Cash flow from Operating Activities

Total

$20,000

$52,200

+

$3,375

+

$5,000

=

$1,500

+

$75,000

+

$4,075

$12,000

-

$7,925

=

$4,075

$52,200

b. Amount of Ending inventory reported on january Balance Sheet

Description	Units	Per Unit Cost	Amount	Calculation
Acquired Inventory	1250	4	5000
Add: purchases	1000	4.5	4500
Total	2250		9500
Less: Sales	1500	8	12000
Closing inventory	750		3375	(750*$4.50)

c.	Gross Margin
	Gross Margin = ( Revenue - Cost of Goods Sold )/ Revenue
	Revenue = $12000
	Cost of Goods Sold = (1250 X $4.00) + (250 X $4.50) = $6125
	Gross mArgin = ($12000-$6125)/$12000 = 0.489 = 49%

D. Net Income = $4075 (from the above horizontal Statement)

E.Balance in Accounts Receivable = $5000 (from tha above horizontal statement)

F.Balance in Accounts payable = $1500 (from tha above horizontal statement)

G.Compute the amount of net cah flow from Operating Activities.

(From the above horizontal statement)

=($1300)+($500)+$7000+($3000) = $2,200

H.Why the net income and retained earnings are same for CIC.

The business was started in the month of january and therefore thers is no opening balance in retained earnings. At the end of the january, the only balance in retained earnings is the balance of net income.