Question

The following transactions apply to Ozark Sales for 2016:

1. The business was started when the company received $50,000 from the issue of common stock.
2. Purchased equipment inventory of $380,000 on account.
3. Sold equipment for $510,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $330,000.
4. Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 2 percent of sales.
5. Paid the sales tax to the state agency on $400,000 of the sales.
6. On September 1, 2016, borrowed $50,000 from the local bank. The note had a 4 percent interest rate and matured on March 1, 2017.
7. Paid $6,200 for warranty repairs during the year.
8. Paid operating expenses of $78,000 for the year.
9. Paid $250,000 of accounts payable.
10. Recorded accrued interest on the note issued in transaction no. 6.
Required:
a. Prepare the income statement for 2016.
b. Prepare the balance sheet for 2016.
c. Prepare the statement of cash flows for 2016.

Answer 1

Answer and Explanation:

The preparation of the income statement for 2016 is shown below:-

OZARK SALES

Income Statement

For the Year Ended December 31, 2016

Sales revenue $510,000

Cost of goods sold $330,000

Gross margin $180,000

Expenses

Operating expenses $78,000

Warranty expenses $10,200

Total operating expenses $88,200

Operating income $91800

Interest expense $667

Net income $91133

b. The preparation of balance sheet for 2016 is shown below:-

OZARK SALES

Balance Sheet

As of December 31, 2016

Assets

Cash $284,600

Merchandise inventory $50,000

Total assets $334,600

Liabilities

Accounts payable $130,000

Sales tax payable $8,800

Notes payable $50,000

Warranties payable $4,000

Interest payable $667

Total liabilities $193,467

Here, we added all liabilities to reach the total liabilities

Stockholders' equity

Common stock $50,000

Retained earnings $91,133

Total stockholders' equity $14,1133

Total liabilities and stockholders'

equity $334,600

c. The Preparation of statement of cash flow is shown below:-

OZARK SALES

Statement of Cash Flows

For the Year Ended December 31, 2016

Cash flows from operating activities:

Inflow from customers $510,000

Inflow from sales tax $40,800

Outflow for expenses -$84,200

Outflow for sales tax -$32,000

Outflow to purchase inventory -$250000

Net cash flow from operating activities $184,600

Cash flows from investing activities

Cash flows from financing activities:

Inflow from loan $50,000

Inflow from stock issue $50,000

Net cash flows from financing activities $100,000

Net change in cash $284,600

Plus: Beginning cash balance 0

Ending cash balance $284,600