Question

Dan Watson started a small merchandising business in 2018. The business experienced the following events during its first year of operation. Assume that Watson uses the perpetual inventory system. Acquired $27,000 cash from the issue of common stock. Purchased inventory for $21,600 cash. Sold inventory costing $17,400 for $29,000 cash. Required Record the events in a horizontal statement model. In the Cash Flow column, use OA to designate operating activity, IA for investment activity, FA for financing activity, or NC for net change in cash. If the element is not affected by the event, leave the cell blank. Prepare an income statement for 2018 (use the multi step format).

Answer 1

Assets = Liabilities + Equity

1) cash 27,000 = 0 + common stock 27,000

Financing Activity 27,000 cash inflow

2) cash -21,600 + inventory 21,600 = 0 + 0

Operating activity -21,600

3) -17,400 inventory = 0 - 17,400 cost of good sold

no cash involve

29,000 cash = 0 + 29,000 revenues

cash from operation + 29,000

Income Statement:

Sales 29,000

COGS (17,400)

gross profit 11,600

net income 11,600

Step-by-step explanation:

1) the company recieve cash, now it posses that amount of cash therefore it has an asset. As it come from the owner it is a contribution it is equity.

2) There is a chane in the composition of asset

we trade cash and received inventory we do not assuem any debt nor the business generate gain/loss It is considered operating activity as derives form the ongoing business.

3) the sale has a cost associate with it. this decrease our inventory available for future sales and makes an incurred cost it decrease our equity.

While the revenue from the sale creates gain for the owners and brings assets (cash) to be possessed by the firm