Chapter 5, Problem 29P

a.

To determine

Record these events in a horizontal statements model and indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) or not affected (NA).

Explanation of Solution

Horizontal statements model: The model that represents all the financial statements, balance sheet, income statement, and statement of cash flows in one table in a horizontal form, is referred to as, horizontal statements model.

Record these events in a horizontal statements model and indicate whether the item is an operating activity (OA), an investing activity (IA), or a financing activity (FA) or not affected (NA):

Table (1)

Note:

OA refers to operating activities.

FA refers to financing activities.

NA refers to does not affected.

3a. this transaction records the cash sale.

3b. this transaction records the credit card sale.

3c. this transaction records the sales made on account.

3d. this transaction records the cost of merchandise sold.

Working Note:

(1) Calculate the amount of credit card sales made to customers.

The merchandise sold to credit card customers for $380,000 and the company charges a fee of 4% on sales. So, the credit card expense (A) is $\left(\$380,000\times 4\%\right)$ $15,200. Thus, the amount of credit card sales made to customers is calculated as follows:

$\begin{array}{c}\begin{array}{l}\text{Credit card sales }\\ \text{made to customers}\end{array}\}\text{= Credit card sales}-\text{Credit card expense}\\ =\$380,000-\$15,200\left(\text{A}\right)\\ =\$364,800\end{array}$

(2) Calculate the amount for uncollectible accounts expense.

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}=\left(\begin{array}{l}\text{Ending accounts}\\ \text{ receivable}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate }\\ \text{of percentage}\end{array}\right)\\ =\$90,000\times 5\%\\ =\$4,500\end{array}$

b)

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Company NS for 2018.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Statement of changes in the stockholders’ equity: This statement reflects whether the components of stockholders’ equity have increased or decreased during the period.

Statement of Cash flows: Statement of cash flows is a statement reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Prepare the income statement for Company NS for the year ended 2018.

Company NS
Statement of income
For the year ended 2018
Particulars	Amount	Amount
Service revenue		$1,200,000
Less: Cost of goods sold		($710,000)
Gross margin		$490,000
Operating expenses
Credit card expense	$15,200
Selling and administrative  expenses	$190,000
Uncollectible accounts expense	$4,500
Total operating expenses		($209,700)
Net income		$280,300

Table (2)

Hence, the net income of Company NS for the year ended December 31, 2018 is $280,300.

Prepare the statement of changes in stockholders’ equity of Company NS for the year ended December 31, 2018.

Company NS
Statement of changes in stockholders' equity
For the year ended December 31, 2018
Particulars	Amount	Amount
Beginning Common Stock	$0
Add: Stock Issued	$200,000
Ending Common Stock		$200,000
Beginning retained earnings	$0
Add/Less: Net Income (Loss)	$280,300
Ending Retained Earnings		$280,300
Total stockholder's equity		$480,300

Table (3)

Hence, the total stockholders’ equity of Company NS for the year ended December 31, 2018 is $480,300.

Prepare the balance sheet of Company NS as on December 31, 2018.

Company NS
Balance sheet
As on December 31, 2018
Assets	Amount	Amount
Cash		$204,800
Accounts Receivable	$90,000
Less: Allowance for doubtful accounts	($4,500)	$85,500
Merchandise Inventory		$190,000
Total Assets		$480,300
Liabilities and stockholders' equity
Liabilities
Total Liabilities		$0
Stockholders’ Equity
Common Stock	$200,000
Retained Earnings	$280,300
Total Stockholders’ Equity		$480,300
Total liabilities and stockholders' equity		$480,300

Table (4)

Hence, the total of assets and liabilities and stockholders’ equity of Company NS as on December 31, 2018 is $480,300.

Prepare the statement of cash flows of Company NS for the year ended December 31, 2018.

Company NS
Statement of cash flows
For the year ended December 31, 2018
Particulars	Amount	Amount
Cash flow from operating activities:
Cash Receipts from Customers	$1,094,800
Outflow for inventory	($900,000)
Outflow for expenses	($190,000)
Net Cash Flow from Operating Activities		$4,800
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		$0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$200,000
Net Cash Flow From Financing Activities		$200,000
Net Change in Cash		$204,800
Add: Beginning Cash Balance		$0
Ending Cash Balance		$204,800

Table (5)

Hence, the net change in cash of Company NS during 2018 is $204,800.

Working note:

Determine the amount of cash collected from customers.

$\begin{array}{c}\text{Cash receipts from customers}=\text{Cash sales}+\left(\begin{array}{l}\text{Collections from }\\ \text{Accounts receivable}\end{array}\right)+\left(\begin{array}{l}\text{Collections from }\\ \text{credit card sales}\end{array}\right)\\ =\$520,000+\$364,800+\$210,000\\ =\$1,094,800\end{array}$