Question

At the beginning of Year 2, the Dotson Company had the following balances in its accounts:

During Year 2, the company experienced the following events:

Cash:14,500

Inventory:28,000

Common Stock:18,000

Retained Earnings:24,500

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CHECK FIGURES

c. Net Income: $11,420
Total Assets: $53,920

1. Purchased inventory that cost $18,600 on account from Richburg Company under terms 2/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $300 were paid in cash.

2. Returned $600 of the inventory it had purchased because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Richburg Company within the cash discount period.

4. Sold inventory that had cost $14,000 for $27,000 on account, under terms 1/10, n/30.

5. Received merchandise returned from a customer. The merchandise originally cost $500 and was sold to the customer for $1,200 cash. The customer was paid $1,200 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $170 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Took a physical count indicating that $32,000 of inventory was on hand at the end of the accounting period.

Required

• Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).

  Record each event in a horizontal financial statements model like the following one:

  • Cash+Acct.Rec.+Mdse. Inv.=Acct. Pay.+Ret Earn Rev-Exp.=Net Inc

• Prepare a multistep income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

Answer 1

Dotson Company
Event		Classification
1a.	(Purchase inventory).	AS
1b.	(Shipping cost).	AE
2	Purchase returns	AU
3	Payment to creditors	AU
4a.	(Recording revenue).	AS
4b.	(Recording cost of goods sold).	AU
5a.	(Reversing revenue).	AU
4b.	(Reversing cost of goods sold).	AS
6	Freight costs	AU
7	Collections on account receivable	AU
8	Inventory write off	AU
	Simple explanation
	Asset source is increase in assets
	Asset use is decrease in assets
	Asset exchange is exchange of one asset for another asset
	Claims exchange is no change in asset, meaning exchange of liabilty for equity

Calculation Discounts + + + Dotson Company Horizontal Statement Balance Sheet Income Statement Statement of CF Assets = Liabilties Stockholders Equity Event Cash + Accounts Rec + Inventory = Accounts Payable + Common Stock + Retained Earnings Revenues - Expenses = Net income Amount Activity Bal. 14,500 + + 28,000 = 18,000 + 24,500 la 18,600 = 18,600 + (300) + 300 (300) OA (600) = (600) + 3 (17,640) + (360) = (18,000) (17,640) OA 27,000 27,000 27,000 (14,000) 14,000 = (14,000) (1,200) + (1,200) - (1,200) (1,200) OA + 500 = (500) = 500 (170) + 170 = (170) (170) OA 7 26,730 + (27,000) + (270) - (270) 26,730 OA (440) = 440 = (440) Bal. 21,920 + - + 32,000 = 18,000 + 24,500 25,530 - 14,110 = 11,420 + + =18,000*2% =360 + + + + + + + + + + Sales Cost of goods sold Sales returns Cost of goods sold Freight costs Sales discounts Inventory write off + + + = 27,000*1% =270 + + 8 + +

Dotson Company Income Statement Sales 27,000 Less (1,200) (270) 25,530 13,500 12,030 Sales returns & allowances Sales discounts Net Sales Cost of goods sold Gross Profit Operating Expenses Freight costs Inventory write off Total Operating expenses Net Income 170 440 610 11,420

Dotson Company Statement of changes in stockholders' equity Beginning balance Net Income Ending Balance Common Shares Retained Earnings Total Stockholders equity 18,000 24,500 42,500 11,420 11,420 18,000 35,920 53,920

Dotson Company Balance Sheet Assets Current Assets Cash Accounts Receivable Merchandise Inventory Liabilities Liabilities 21,920 Accounts Payable 32,000 Stockholders Equity Common Stock Retained earnings Total Stockholders Equity 18,000 35,920 53,920 Total Assets 53,920 Total Liabilities & Stockholders Equity 53,920

Dotson Company Statement of cash flows Calculation Cash flows from Operating Activities Net income 11,420 Adjustments to reconcile net income to net cash from operating activities Decrease in Inventory (4,000) =28,000-32,000 Net Cash Provided/(Used) by Operating Activities 7,420 Cash flows from Investing Activities Net Cash Provided/(Used) by Investing Activities Cash flows from Financing Activities Net Cash Provided/(Used) by Financing Activities Net change in cash Beginning cash balance Ending cash balance 7,420 14,500 21,920