Concept explainers
Comprehensive cycle problem: Perpetual system
At the beginning of 2018, the Redd Company had the following balances in its accounts:
During 2018, the company experienced the following events:
1. Purchased inventory that cost $15,200 on account from Ross Company under terms 1/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $200 were paid in cash.
2. Returned $800 of the inventory that 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 Ross Company within the cash discount period.
4. Sold inventory that had cost $18,000 for $32,000 on account, under terms 2/10, n/45.
5. Received merchandise returned from a customer. The merchandise originally cost $800 and was sold to the customer for $1,500 cash. The customer was paid $1,500 cash for the returned merchandise.
6. Delivered goods FOB destination in Event 4. Freight costs of $140 were paid in cash.
7. Collected the amount due on the
8. Took a physical count indicating that $21,100 of inventory was on hand at the end of the accounting period.
Required
a. Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).
b. Record each event in a statements model like the following one.
c. Prepare a multistep income statement, a statement of changes in stockholders’ equity, a
a.
Identify the events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).
Explanation of Solution
Identify the events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).
Event No. | Event type |
1a. | AS |
1b. | AE |
2. | AU |
3. | AU |
4a. | AS |
4b. | AU |
5a. | AU |
5b. | AS |
6. | AU |
7. | AU |
8. | AU |
Table (1)
- Asset source: All the transactions which increase assets either by borrowing from creditors (increase liabilities), or by earning operating revenues (increase in stockholders’ equity) are referred to as asset source transactions.
- Asset use: All the transactions which decrease assets either by paying off liabilities (decrease in liabilities), or by paying operating expenses (decrease in stockholders’ equity) are referred to as asset use transactions.
- Asset exchange: All the transactions which increase assets and decrease assets simultaneously, with no effect on the total assets value are referred to as asset exchange transactions.
- Claims exchange: All the transactions which include exchange of liabilities for equity are referred to as claims exchange transactions.
b.
Record each event in a statements model.
Explanation of Solution
Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.
Record each event in a statements model.
Table (2)
Working Note:
(1) Compute purchase discount.
(2) Compute the cash paid for inventory purchased.
(3) Compute sales discount.
(4) Compute cash received.
c.
Prepare a multistep income statement, statement of stockholders’ equity, balance sheet, and statement of cash flows for Company R.
Explanation of Solution
Multi-step income statement: The income statement represented in multi-steps with several subtotals, to report the income from principal operations, and separate the other expenses and revenues which affect net income, is referred to as multi-step income statement.
Prepare a multistep income statement for Company R for the year ended December 31, 2018.
Company R | ||
Income Statement | ||
For the Year Ended December 31, 2018 | ||
Net sales | $29,860 | |
Cost of goods sold (5) | ($18,356) | |
Gross margin | $11,504 | |
Operating expenses: | ||
Transportation-out | ($140) | |
Net income | $11,364 |
Table (3)
Working Note:
(5) Determine the amount of cost of goods sold.
Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.
Prepare a statement of stockholders’ equity for Company R for the year ended December 31, 2018.
Company R | ||
Statement of Stockholders’ Equity | ||
For the Year Ended December 31, 2018 | ||
Beginning common stock | $30,000 | |
Add: Stock issued | $0 | |
Ending common stock | $30,000 | |
Beginning retained earnings | $11,900 | |
Add: Net income | $11,364 | |
Ending retained earnings | $23,264 | |
Total stockholders’ equity | $53,264 |
Table (4)
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
Prepare the balance sheet for Company R as at December 31, 2018.
Company R | ||
Balance Sheet | ||
December 31, 2018 | ||
Assets | ||
Cash | $32,164 | |
Merchandise inventory | $21,100 | |
Total assets | $53,264 | |
Liabilities | $0 | |
Stockholders’ equity | ||
Common stock | $30,000 | |
Retained earnings | $23,264 | |
Total stockholders’ equity | $53,264 | |
Total liabilities and stockholders’ equity | $53,264 |
Table (5)
Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and the result of these transactions is reported as ending balance of cash at the end of reported period.
Prepare the statement of cash flows for Company R for the year ended December 31, 2018.
Company R | ||
Statement of Cash Flows | ||
For the Year Ended December 31, 2018 | ||
Cash flows from operating activities: | ||
Inflow from customers (6) | $29,860 | |
Outflow for inventory (7) | ($14,456) | |
Outflow for expenses | ($140) | |
Net cash flow from operating activities | $15,624 | |
Cash flows from investing activities | $0 | |
Cash flows from financing activities | $0 | |
Net change in cash | $15,624 | |
Add: Beginning cash balance | $16,900 | |
Ending cash balance | $31,164 |
Table (6)
Working note:
(6) Determine the cash inflow from customers.
(7) Determine the cash outflow for inventory.
Want to see more full solutions like this?
Chapter 3 Solutions
Survey Of Accounting
- Analyzing the Accounts Casey Company uses a perpetual inventory system and engaged in the following transactions: a. Made credit sales of $825,000. The cost of the merchandise sold was $560,000. b. Collected accounts receivable in the amount of $752,600. c. Purchased goods on credit in the amount of $574,300. d. Paid accounts payable in the amount of $536,200. Required: Prepare the journal entries necessary to record the transactions. Indicate whether each transaction increased cash, decreased cash, or had no effect on cash.arrow_forwardTeams MSFT Corporation has the following information: Inventory conversion period 79.02 days Receivables collection period 35.8 days Payables deferral period 9.6 days Can you determine the length of time (days) for them to cycle cash in the company? (represent your numeric result in two decimal places)arrow_forwardAt the beginning of the current season on April 1, the ledger of Novak's Discorama showed Cash $1,900, Inventory $2,600, and Owner's Capital $4,500. The following transactions were completed during April 2022. Apr.5 7 Paid freight on the Mumford purchase $50. Received credit from Mumford Co. for merchandise returned $200. 10 Sold merchandise on account for $900, terms n/30. The merchandise sold had a cost of $540. Purchased disc golf shirts and other accessories on account from Saucer Sportswear $620, terms 1/10, n/30. 14 Paid Mumford Co. in full, less discount. 17 Received credit from Saucer Sportswear for merchandise returned $20. 20 Made sales on account for $560, terms n/30. The cost of the merchandise sold was $350. 21 Paid Saucer Sportswear in full, less discount. 27 Granted an allowance to customers for clothing that did not fit $20. 30 Received payments on account from customers $910. 9 Purchased golf discs, bags, and other inventory on account from Mumford Co. $1,050, FOB…arrow_forward
- explain the image provided the Accounts receivable turn over, days to collect, Inventory turnover,Days to sell, accounts payable turnover,days to pay and give recommendationarrow_forwardAccounting for uncollectible accounts (aging-of-receivables method), notes receivable, and accrued interest revenue Sleepy Recliner Chairs completed the following selected transactions: Record the transactions in the journal of Sleepy Recliner Chairs. Explanations are not required. (Round to the nearest dollar.)arrow_forwardPlease do not give solution in image format thankuarrow_forward
- Prepare the company’s Statement of profit or loss for the year ended 31st December 2018 and its Statement of financial position as at that date, in accordance with IAS 1 Presentation of Financial Statements.arrow_forwardCurrent Attempt in Progress The trial balance of Crane Company at the end of its fiscal year, August 31, 2022, includes these accounts: Inventory $35,000; Purchases $154,900; Sales Revenue $191,000; Freight-In $9,200; Sales Returns and Allowances $4,400; Freight-Out $1,900; and Purchases Returns and Allowances $6,900. The ending inventory is $28,000. Prepare a cost of goods sold section for the year ending August 31.arrow_forwardPeru Industries began operations on January 1, 2023. During the next two years, the company completed a number of transactions involving credit sales, accounts receivable collections, and bad debts (assume a perpetual inventory system). These transactions are summarized as follows:2023 Sold merchandise on credit for $2,320,000, terms n/30 (COGS = $1,282,000). Wrote off uncollectible accounts receivable in the amount of $35,400. Received cash of $1,386,000 in payment of outstanding accounts receivable. In adjusting the accounts on December 31, concluded that 1.5% of the outstanding accounts receivable would become uncollectible. 2024 Sold merchandise on credit for $3,038,000, terms n/30 (COGS = $1,655,000). Wrote off uncollectible accounts receivable in the amount of $55,100. Received cash of $2,294,000 in payment of outstanding accounts receivable. In adjusting the accounts on December 31, concluded that 1.5% of the outstanding accounts receivable would become uncollectible. Company…arrow_forward
- Peru Industries began operations on January 1, 2020. During the next two years, the company completed a number of transactions involving credit sales, accounts receivable collections, and bad debts (assume a perpetual inventory system). These transactions are summarized as follows: 2021 a. Sold merchandise on credit for $3,066,000, terms n/30 (COGS = $1,673,000). b. Wrote off uncollectible accounts receivable in the amount of $55,700. c. Received cash of $2,318,000 in payment of outstanding accounts receivable. d. In adjusting the accounts on December 31, concluded that 1.5% of the outstanding accounts receivable would become uncollectible. The company uses the allowance method to account for uncollectible. Calculate: (excel) Record the sales.(point a) Record cost of sales.(point a) Record written off uncollectible accounts.(point b) Record collections from credit customers.(point c) Record the estimate for uncollectible accounts.(point d)arrow_forwardPrepare a multiple-step income statement for November.arrow_forwardCurrent Attempt in Progress The adjusted trial balance of Novak Corp. shows these data pertaining to sales at the end of its fiscal year, October 31, 2022: Sales Revenue $907,200; Freight-Out $13,600; Sales Returns and Allowances $19,800; and Sales Discounts $15,200. Prepare the sales section of the income statement. Novak Corp. Income Statement (Partial) +Aarrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub