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 | Beginning Balances |
Cash | $28,000 |
Inventory | 14,000 |
Common stock | 36,000 |
Retained earnings | 6,000 |
Total | $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.
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