The trial balance for Terry's Auto Shop as of January 1, 2016, follows: Account...

Question:

The trial balance for Terry's Auto Shop as of January 1, 2016, follows:

Account Titles Debit Credit
Cash $ 6,090
Inventory 3,150
Common Stock $ 7,480
Retained Earnings 1,760
Total $ 9,240 $ 9,240

The following events affected the company during the 2016 accounting period:

1. Purchased merchandise on account that cost $4,280.

2. The goods in Event 1 were purchased FOB shipping point with freight cost of $215 cash.

3. Returned $420 of damaged merchandise for credit on account.

4. Agreed to keep other damaged merchandise for which the company received a $275 allowance.

5. Sold merchandise that cost $2,580 for $4,790 cash.

6. Delivered merchandise to customers in Event 5 under terms FOB destination with freight costs amounting to $145 cash.

7. Paid $2,980 on the merchandise purchased in Event 1.

Required:

a. Record the events in general journal format.

Event 1: Record entry for purchase of merchandise on account.

Event 2: Record entry cash paid for freight cost.

Event 3: Record entry to return of damaged merchandise for credit on account.

Event 4: Record entry for allowances to keep other damaged Merchandise.

Event 5: Record sale inventory for cash.

Event 6: Record entry for cost of goods sold.

Event 7: Record entry for freight cost paid.

Event 8: Record cash paid for merchandise purchased.

b. Open general ledger T-accounts with the appropriate beginning balances, and post the journal entries to the T-accounts.

c. Prepare an income statement, balance sheet, and statement of cash flows. (Assume that closing entries have been made.)

d. Why does a difference exist between net income and net cash flow from operating activities?

Statement of Cash Flows:

Statement of Cash flows presents the net cash flow provided by or used in the operations. The financial transactions are classified as operating, investing or financing activities and can be prepared by either the direct or indirect method.

Answer and Explanation:

a. Record the events in general journal format.

Event Account Debit Credit
1 Inventory $4,280
Accounts Payable $4,280
To record the purchase of inventory.
2 Inventory $215
Cash $215
To record the payment of freight charge.
3 Accounts Payable 420
Inventory 420
To record the return of inventory.
4 Accounts Payable 275
Inventory 275
To record the allowance provided to customers.
5 Cash 4,790
Sales 4,790
To record the sale of inventory.
5 Cost of Goods Sold 2,580
Inventory 2,580
To record the cost of inventory sold.
6 Freight Out 145
Cash 145
To record the payment of freight out.
7 Accounts Payable 2,980
Cash 2,980
To record the payment of payable.


b. Open general ledger T-accounts with the appropriate beginning balances, and post the journal entries to the T-accounts.

Account Debit Credit
Cash 6,090
2 215
5 4,790
6 145
7 2,980
Balance 1,540


Account Debit Credit
Inventory 3,150
1 4,280
2 215
3 420
4 275
5 2,580
Balance 4,370


Account Debit Credit
Common Stock 7,480
Balance 7,480


Account Debit Credit
Retained Earnings 1,760
Balance 1,760


Account Debit Credit
Accounts Payable 4,280
3 420
4 275
7 2,980
Balance 605


Account Debit Credit
Sales 4,790
Balance 4,790


Account Debit Credit
Cost of Goods Sold 2,580
Balance 2,580


Account Debit Credit
Freight Out 145
Balance 145


c. Prepare an income statement, balance sheet, and statement of cash flows. (Assume that closing entries have been made.)

Terry's Auto Shop

Income Statement

For the Month Ended January 31, 2016


Sales 4,790
Cost of Good Sold -2,580
Gross Margin 2,210
Selling Expenses -145
Net Income 2,065


Terry's Auto Shop

Balance Sheet

As of the Month Ended January 31, 2016


Assets
Current Assets
Cash 7,540
Inventory 4,370
Total Assets 11,910
Liabilities and Equity
Liabilities
Current Liabilities 605
Total Liabilities 605
Equity
Common Stock 7,480
Retained Earnings 3,825
Total Equity 11,305
Total Liabilities and Equity 11,910


Terry's Auto Shop

Statement of Cash Flows

For the Month Ended January 31,2016


Beginning Cash 6,090
Payment of Freight in -215
Proceeds from Sale 4,790
Payment of Freight Out -145
Payment of Purchases -2,980
Net Cash Inflow 1,450
Cash, Ending 7,540


d. Why does a difference exist between net income and net cash flow from operating activities?

It is because not all purchases are paid with cash and not all sales are collected. Portion of the difference of cash flows and net income are the balances remained in the non-cash items such as inventories, accounts receivables and accounts payable.


Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
11K

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