Question

Exercise 3-6 Effect of purchase returns and allowances and freight costs on the financial statements: perpetual system The beginning account balances for Jerry's Auto Shop as of January 1, 2012 follows: Account Titles Cash Inventory Common stock Retained earnings Total Beginning Balances $28,000 14,000 36,000 6,000 $42,000 The following events affected the company during the 2012 accounting period: 1. Purchased merchandise on account that cost $18,000. 2. The goods in Event 1 were purchased FOB shipping point with freight cost of $1,000 cash. 3. Returned $3,600 of damaged merchandise for credit on account. 4. Agreed to keep other damaged merchandise for which the company received a $1,400 allowance. 5. Sold merchandise that cost $16,000 for $34,000 cash. 6. Delivered merchandise to customers in Event 5 under terms FOB destination with freight costs amounting to $800 cash. 7. Paid $12,000 on the merchandise purchased in Event 1. Required a. Organize appropriate ledger accounts under an accounting equation. Record the beginning balances and the transaction data in the accounts. b. Prepare an income statement and a statement of cash flows for 2012 c. Explain why a difference does or does not exist between net income and net cash flow from operating activities.

Answer 1

JERRY'S AUTO SHOP
Effect of Events on the Financial Statements
	Assets			=	Liabilities	+	Stockholders' Equity			Account Titles for Retained Earnings
Events	Cash	+	Inventory	=	Accounts Payable	+	Common Stock	+	Retained Earnings
Beg. Bal.	$28,000.00	+	$14,000.00	=		+	$36,000.00	+	$6,000.00	NA
1		+	$18,000.00	=	$18,000.00	+		+		NA
2	-$1,000.00	+	$1,000.00	=		+		+		NA
3		+	-$3,600.00	=	-$3,600.00	+		+		NA
4		+	-$1,400.00	=	-$1,400.00	+		+		NA
5a.	$34,000.00	+		=		+		+	$34,000.00	Sales
5b.		+	-$16,000.00	=		+		+	-$16,000.00	COGS
6	-$800.00	+		=		+		+	-$800.00	Frieght
7	-$12,000.00	+		=	-$12,000.00	+		+		NA
End. Bal.	$48,200.00	+	$12,000.00	=	$1,000.00	+	$36,000.00	+	$23,200.00

JERRY'S AUTO SHOP
Income Statement
Net sales	$34,000.00
Less: Cost of goods sold	$16,000.00
Gross profit	$18,000.00
Operating expenses
Frieght	$800.00
Net income	$17,200.00
JERRY'S AUTO SHOP
Statement of Cash Flows
Cash flow from operating activities
Cash inflow from Sales	$34,000.00
Cash outflow for inventory	-$13,000.00
Cash outflow for expenses	-$800.00
Net cash flow from operating activities		$20,200.00
Cash flows from investing activities		$0.00
Cash flows from financing activities		$0.00
Net change in cash		$20,200.00
Plus: Beginning cash balance		$28,000.00
Ending cash balance		$48,200.00

c. There will be difference exist between Net Income and Operating Cash Flow Statement because while calculating cash Flow from Operating activities all the cash receipt and expense paid related with Operating activities need to consider while in calculating net income all expenses on accrual basis need to consider.