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- = -0- + -0- + -0- -0- – -0- = -0- -0- 1 5,000 + -0- = -0- + 5,000 + -0- -0- – -0- = -0- 5,000 FA 2 (4,500) + 4,500 = -0- + -0- + -0- -0- – -0- = -0- (4,500)      OA 3(a) 6,000 + -0- = -0- + -0- + 6,000 6,000 – -0- = 6,000 6,000 OA 3(b) -0- + (3,500) = -0- + -0- + (3,500) -0- – 3,500 = (3,500) -0- 4 (2,000) + -0- = -0- + -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.