Question

g Dan Watson started a small merchandising business in Year 1. The business experienced the following events during its first year of operation. Assume that Watson uses the perpetual inventory system. Acquired $30,000 cash from the issue of common stock. Purchased inventory for $18,000 cash. Sold inventory costing $15,000 for $32,000 cash. Required a. Record the events in general journal format. b. Post the entries to T-accounts. c. Determine the amount of gross margin. d. What is the amount of net cash flow from operating activities for Year 1

Answer 1

Answer:

a. Journals

Cash $30,000 (debit)

Common Stock $30,000 (credit)

Cash in Exchange of Common Stock

Inventory $18,000 (debit)

Cash $18,000 (credit)

Cash Purchase of Inventory

Cash $32,000(debit)

Cost of Sales $15,000 (debit)

Sales Revenue $32,000 (credit)

Inventory $15,000 (credit)

Sale of Inventory on cash basis

b. T - Accounts

Cash Account

Debit :

Common Stock             $30,000

Sales Revenue              $32,000

Credit :

Inventory                       $18,000

Balance                         $44,000

Common Stock

Debit :

Balance                        $30,000

Credit :

Cash                             $30,000

Balance

Inventory

Debit :

Cash                            $18,000

Credit :

Cost of Sales              $15,000

Balance                        $3,000

Sales

Debit :

Balance                     $32,000

Credit :

Cash                         $32,000

Cost of Sales

Debit :

Inventory                   $15,000

Credit :

Balance                    $15,000

c. Gross Margin = $17,000

d. net cash flow from operating activities for Year 1 = $14,000

Explanation:

Gross Margin = Sales - Cost of Sales

                        = $32,000 - $15,000

                        = $17,000

Net Cashflow from Operating Activities

Cash Paid to Suppliers                                         ($18,000)

Calculation :

Cost of Sales                                $15,000

Add Increase in Inventory            $3,000

Cash Paid to Suppliers                $18,000

Cash Receipts from Customers                           $32,000

Net Cash From Operating Activities                    $14,000