Question

The following transactions apply to Ozark Sales for Year 1:

The business was started when the company received $49,000 from the issue of common stock.
Purchased equipment inventory of $176,500 on account.
Sold equipment for $203,000 cash (not including sales tax).
Sales tax of 7 percent is collected when the merchandise is sold. The merchandise had a cost of $128,000.
Provided a six-month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 3 percent of sales.
Paid the sales tax to the state agency on $153,000 of the sales.
On September 1, Year 1, borrowed $20,000 from the local bank. The note had a 6 percent interest rate and matured on March 1, Year 2.
Paid $5,500 for warranty repairs during the year.
Paid operating expenses of $53,500 for the year.
Paid $124,200 of accounts payable.
Recorded accrued interest on the note issued in transaction no. 6.

Prepare the income statement, balance sheet, and statement of cash flows for year 1.

Answer 1

Answer and Explanation:

According to the scenario, The presentation of the each financial statement is presented below:

Income Statement

Particular Amount ($)

Sales 203,000

Less - merchandise cost 128,000

Gross Profit 75,000

Less-Operating expenses paid 53,500

Less-Paid warranty repairs 5,500

Less-Provision for warranty($203,000 ×3%) 6,090

Less-interest expenses($20,000 × 6% × 4 ÷ 12) 400

Net Income 9510

Balance Sheet

Assets Amount ($) Liabilities

& stockholder’s equity Amount ($)

Cash 92,300 Accounts payable

($176,500-$124,200) 52,300

Merchandise

inventory

($176,500-$128,000) 48,500 Sales tax payable

{($203,000 × 7%) - $10,710} 3,500

Warranty payable 6,090

Interest payable 400

Notes payable 20,000

Common stock equity 49,000

Retained earnings 9,510

Total 140,800 Total 140,800

Cash Flow Statement

Particular Amount($)

Cash flow from operating activities:-

Cash receipt from sale 217,210

Less - Paid accounts payable -124,200

Less - Sales tax paid -10,710

Less - Paid warranty repairs -5,500

Less - paid operating expenses -53,500

Total amount of Cash flow from operating activities 23,300

Cash flow from investing activities:-

Cash flow from financing activities:-

Issue of common stock 49,000

Add-Borrowing from local bank 20,000

Total amount of Cash flow from financing activities 69,000

Net increase in cash 92,300

Opening cash balance -

Ending cash balance 92,300

Working note:

Total Cash Amount

Particulars Amount ($)

Amount received from issue of common stock 49,000

Add-Sold equipment $203,000 + ($203,000 × 7%) 217,210

Less-Sales tax paid to the state agency ($153,000 × 7%) 10,710

Add-Borrowed from local bank 20,000

Less-Paid warranty repairs 5,500

Less-Paid operating expenses 53,500

Less-Paid accounts payable 124,200

Net cash 92,300

Retained Earnings

Particulars Amount ($)

Sold equipment 203,000

Less-Merchandise cost 128,000

Less-Paid warranty repairs 5,500

Less-Paid operating expenses 53,500

Less-interest expenses 400

Less-Provision for warranty 6,090

Net Retained earnings 9,510

These are items of the financial statement i.e listed above