Statement of the Problem Case 3-1 Maynard Company (B) Diane Maynard was grateful for the balance sheets that her friend prepared. In going over the numbers, she remarked, “It’s sort of surprising that cash increased by $31,667, but net income was only $19,635. Why was that? ” Her friend replied, “A partial answer to that questionis to look at an income statement for June. I think I can find the data I need to prepare on for you. ” In addition to the data given in the (A) case, her friend found a record of cash receipts and disbursements, which is summarized in Exhibit 1.
She also learned that all accounts payable were to vendors for purchase of merchandise inventory and that cost of sales was $39,345 in June. Questions: 1. Prepare an income statement for June in proper format. Explain the derivation of each item on this statement, including cost of sales. 2. Explain why the change in the cash balance was greater then the net income. 3. Explain why the following amounts are incorrect cost of sales amounts for June: (a) $14,715 and (b) $36,030. Under what circumstances would these amounts be correct cost of sales
Given 1. Cost of Sales = $39,345 2. June 1 Balance Sheet [pic] 3. June 30 Balance Sheet [pic] 4. Cash Receipts and Disbursements for the month of June [pic] Solution Question 1. Prepare an income statement for June in proper format. Explain the derivation of each item on this statement, including cost of sales. a) Income Statement: [pic] b) Derivations i. Sales revenue: [pic] ii. Cost of sales: [pic] iii. Operating expenses: [pic] iv. Provision for income tax: [pic] Question 2.
Explain why the change in the cash balance was greater than the net income. [pic] – Change in cash balance was greater than the net income because the company received cash payments (for their sales, receivables and bank loan) more than they paid in cash their payables/liabilities (difference = 31,677): [pic] -Also, looking at the change in non-cash assets vs. the change in liabilities for the month: – Change in non-cash assets < the change in liabilities, with a difference of $23,742 Question 3.
Explain why the following amounts are incorrect cost of sales amounts for June, and under what circumstances would these amounts be correct cost of sales amounts: a) $14,715 – $14,715 is the cash purchase of merchandise. This is incorrect because this is only a part of the total merchandise acquired and consumed within the accounting period. Inventory at the start and end of the month must be considered. Also, merchandise purchases even not yet paid must also be considered. – This will be correct cost of sales amounts if ) the company has no merchandise inventory at the start of the period b) all purchases of merchandise were paid in cash within the period c) there is no inventory at the end of the period. b) $36,030 – $36,030 is the total purchase of merchandise within the period of June. This is incorrect because there is beginning inventory and month-end inventory. – This will be correct cost of sales amounts if a) the company has no inventory at the start of the period b) there is no inventory at the end of the period