Question

Effect of purchase returns and allowances and purchase discounts on the financial statements: Perpetual systemThe following events were completed by Dana's Imports in September 2018:Sept. 1 Acquired $50,000 cash from the issue of common stock.1 Purchased $28,000 of merchandise on account with terms 2/10,n/30.5 Paid $600 cash for freight to obtain merchandise purchased on September 1.8 Sold merchandise that cost $15,000 to customers for $31,000 on account, with terms 2/10,n/308 Returned $600 of defective merchandise purchased on September 1 purchase to the supplier.10 Paid cash from the balance due on the merchandise purchased on September 1.20 Received cash from customers of September 8 sale in settlement of the account balances, but not within the discount period.30 Paid $2,450 cash for selling expenses.a. Record each event in a statements model like the following one. The first event is recorded as an example.b. Prepare an income statement for the month ending September 30.c. Prepare a statement of cash flows for the month ending September 30.d. Explain why there is a difference between net income and cash flow from operating activitie

Answer 1

Answer:

net income                13,550

cash flow from operating activities: 1,098

cash flow for the period 51,098

The income statement works with accrual accounting it only recognzie as expense the portion we sold

While the cash flow obviously, works with cash basis therefore, all the merchandise paid is considered making the operating cash flow smaller than net income.

Explanation:

NET INCOME

Sales revenue         31,000

COGS                     (15,000)  

gross profit               16,000

operating expense  (2,450)  

net income                13,550

CASH FLOW

operating

collection from customer 31,000**

freight-in                               (600)

payment to supplier         (26.852‬‬)*

expenses paid                   (2,450)

cash flow from operating activities: 1.098‬

financing

issuance of common stock   50,000

cash flow for the period 51,098

*account balance:

(28,000 invoice nominal - 600 return) * (1 - 2% discount)

** the customer pay after the 10 days therefore it is not granted a discount