Demonstration Problem 5-1 ─ Solution

Assets

Liab.

Equity

Rev.

─

Exp.

Net Inc.

Cash Flow

No.

Cash

Inven.

Liab.

C. Cap.

Ret. Ear.

Beg. Bal.

-0-

–

-0-

5,000

-0-

5,000

-0-

–

-0-

5,000 FA

(4,500)

4,500

-0-

–

-0-

(4,500) OA

3(a)

6,000

-0-

6,000

–

-0-

6,000

6,000 OA

3(b)

-0-

(3,500)

-0-

(3,500)

-0-

–

3,500

(3,500)

-0-

(2,000)

-0-

(2,000)

-0-

–

2,000

(2,000)

(2,000) OA

Totals

4,500

1,000

-0-

5,000

500

6,000

–

5,500

500

4,500 NC

Jefferson Hardware Store Financial Statements

Income Statement
For the Period Ended		20X1

Sales		$6,000
Cost of Goods Sold (i.e., Product Cost)		(3,500)
Gross Margin		$2,500
Operating Expense (i.e., Period Cost)		(2,000)
Net Income		$ 500

Balance Sheet
Assets
Cash		$4,500
Inventory		1,000
Total Assets		$5,500

Equity
Contributed Capital		$5,000
Retained Earnings		500
Total Equity		$5,500

Demonstration Problem 5-2 ─ Solution ─ Accounting Equation

20X1	Cash	+	Acct. Rec.	+	Inv.	=	Acct. Pay.	+	Cont. Capital	+	Ret. Ear.
Beginning Balances	$ -0-		$ -0-		$ -0-		$ -0-		$ -0-		$ -0-
(1) Capital Acquisition	60,000								60,000
(2) Inventory Purchase					54,000		54,000
(3) Transportation-in	(1,000)				1,000
(4) Purchase Return					(4,000)		(4,000)
(5a) Purchase Discount					(1,000)		(1,000)
(5b) Pay. of Acct. Pay.	(49,000)						(49,000)
(6a) Sale of Inventory			68,000								68,000
(6b) Cost of Goods Sold					(43,000)						(43,000)
(7a) Sales Return			(4,000)								(4,000)
(7b) Cost of Goods Sold					3,000						3,000
(8) Transportation-out	(1,200)										(1,200)
(9a) Sales Discount			(500)								(500)
(9b) Acct. Rec. Collect.	49,500		(49,500)
(10) Other Oper. Exp.	(9,600)										(9,600)
	─────		─────		─────		─────		─────		─────
Ending Balances	$48,700		$14,000		$10,000		$ -0-		$60,000		$12,700
	═════		═════		═════		════		═════		═════

Demonstration Problem 5-2 ─ Solution ─ Financial Statements

Lisa’s Dress Shop Financial Statements

Income Statement
For the Period Ended		20X1

Net Sales		$63,500
Cost of Goods Sold (i.e., Product Cost)		(40,000)
Gross Margin		$23,500
Transportation-out (i.e., Period Cost)		(1,200)
Other Operating Exp. (i.e., Period Cost)		(9,600)
Net Income		$12,700

Balance Sheet
Assets
Cash		$48,700
Accounts Receivable		14,000
Inventory		10,000
Total Assets		$72,700

Equity
Contributed Capital		$60,000
Retained Earnings		12,700
Total Equity		$72,700

Statement of Cash Flows
Net Cash Flow from Operating Activities¹		$(11,300)

Net Cash Flow from Investing Activities		-0-

Net Cash Flow from Financing Activities		60,000
Net Change in Cash		$48,700
Beginning Cash Balance		-0-
Ending Cash Balance		$48,700

¹The net cash flow from operating activities is composed of a $49,500 inflow from revenue and outflows of $1,000 for transportation-in, $49,000 for payments of accounts payable, $1,200 for transportation-out, and $9,600 for other operating expenses (i.e., $49,500 ─ $1,000 ─ $49,000 ─ $1,2000 ─ $9,600 = $11,300).

Demonstration Problem 5-3 ─ Solution

Date		Account Titles	Debit	Credit
Event No.	1	Cash	60,000
		Contributed Capital		60,000
Event No.	2	Purchases	54,000
		Accounts Payable		54,000
Event No.	3	Transportation-in	1,000
		Cash		1,000
Event No.	4	Accounts Payable	4,000
		Purchases Returns and Allowances		4,000
Event No.	5a	Accounts Payable	1,000
		Purchases Discounts		1,000
Event No.	5b	Accounts Payable	49,000
		Cash		49,000
Event No.	6	Accounts Receivable	68,000
		Sales		68,000
Event No.	7	Sales Returns and Allowances	4,000
		Accounts Receivable		4,000
Event No.	8	Transportation-out	1,200
		Cash		1,200
Event No.	9a	Sales Discount	500
		Accounts Receivable		500
Event No.	9b	Cash	49,500
		Accounts Receivable		49,500
Event No.	10	Other Operating Expenses	9,600
		Cash		9,600
Adjusting		Cost of Goods Sold	40,000
		Inventory	10,000
		Purchase Returns and Allowances	4,000
		Purchases Discounts	1,000
		Purchases		54,000
		Transportation-in		1,000
Closing		Sales Revenue	68,000
		Sales Returns and Allowances		4,000
		Sales Discounts		500
		Cost of Goods Sold		40,000
		Transportation-out		1,200
		Other Operating Expenses		9,600
		Retained Earnings		12,700

Demonstration Problem 5-3 ─ Solution

Lisa’s Dress Shop Schedule of Cost of Goods Sold
Beginning Inventory		$ -0-
Purchases		54,000
Purchase Returns and Allowances		(4,000)
Purchase Discounts		(1,000)
Transportation-in		1,000
Cost of Goods Available for Sale		$50,000
Ending Inventory		(10,000)
Cost of Goods Sold		$40,000

The financial statements would be the same as those prepared for Demonstration Problem 5-2. The periodic inventory method is an alternative approach of arriving at the same end result.