Chapter 5, Problem 30P

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 $115,000 and the company charges a fee of 3% on sales. So, the credit card expense (A) is $\left(\$115,000\times 3\%\right)$  $15,200. Thus, the amount of credit card sales made to customers is calculated as follows:

$\begin{array}{c}\begin{array}{l}\text{Credit card sales }\\ \text{made to customers}\end{array}\}\text{= Credit card sales}-\text{Credit card expense}\\ =\$115,000-\$3,450\left(\text{A}\right)\\ =\$111,550\end{array}$

Working Note 2: Calculate the amount for uncollectible accounts expense:

$\begin{array}{c}\begin{array}{l}\text{Uncollectible account }\\ \text{expense}\end{array}\}=\left(\begin{array}{l}\text{Ending accounts}\\ \text{ receivable}\end{array}\right)\times \left(\begin{array}{l}\text{Estimated rate }\\ \text{of percentage}\end{array}\right)\\ =\$3,700\times 5\%\\ =\$185\end{array}$

b)

To determine

Prepare income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Company IS for 2014.

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 IS for the year ended 2014.

Company IS
Statement of income
For the year ended 2014
Particulars	Amount	Amount
Service revenue		$180,000
Less: Cost of goods sold		($95,000)
Gross margin		$85,000
Operating expenses
Credit card expense	$3,450
Selling and administrative  expenses	$51,500
Uncollectible accounts expense	$185
Total operating expenses		($55,135)
Net income		$29,865

Table (2)

Hence, the net income of Company IS for the year ended December 31, 2014 is $29,865.

Prepare the statement of changes in stockholders’ equity of Company IS for the year ended December 31, 2014.

Company IS
Statement of changes in stockholders' equity
For the year ended December 31, 2014
Particulars	Amount	Amount
Beginning Common Stock	$0
Add: Stock Issued	$50,000
Ending Common Stock		$50,000
Beginning retained earnings	$0
Add/Less: Net Income (Loss)	$29,865
Ending Retained Earnings		$29,865
Total stockholder's equity		$79,865

Table (3)

Hence, the total stockholders’ equity of Company IS for the year ended December 31, 2014 is $79,865.

Prepare the balance sheet of Company IS as on December 31, 2014.

Company IS
Balance sheet
As on December 31, 2014
Assets	Amount	Amount
Cash		$51,350
Accounts Receivable	$3,700
Less: Allowance for doubtful accounts	($185)	$3,515
Merchandise Inventory		$25,000
Total Assets		$79,865
Liabilities and stockholders' equity
Liabilities
Total Liabilities		$0
Stockholders’ Equity
Common Stock	$50,000
Retained Earnings	$29,865
Total Stockholders’ Equity		$79,865
Total liabilities and stockholders' equity		$79,865

Table (4)

Hence, the total of assets and liabilities and stockholders’ equity of Company IS as on December 31, 2014 is $79,865.

Prepare the statement of cash flows of Company IS for the year ended December 31, 2014.

Company IS
Statement of cash flows
For the year ended December 31, 2014
Particulars	Amount	Amount
Cash flow from operating activities:
Cash Receipts from Customers	$172,850
Outflow for inventory	($120,000)
Outflow for expenses	($51,500)
Net Cash Flow from Operating Activities		$1,350
Cash Flows From Investing Activities:
Net Cash Flow From Investing Activities		$0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	$50,000
Net Cash Flow From Financing Activities		$50,000
Net Change in Cash		$51,350
Add: Beginning Cash Balance		$0
Ending Cash Balance		$51,350

Table (5)

Hence, the net change in cash of Company IS during 2014 is $51,350.

Working note:

Determine the amount of cash collected from customers.

$\begin{array}{c}\text{Cash receipts from customers}=\text{Cash sales}+\left(\begin{array}{l}\text{Collections from }\\ \text{Accounts receivable}\end{array}\right)+\left(\begin{array}{l}\text{Collections from }\\ \text{credit card sales}\end{array}\right)\\ =\$50,000+\$11,300+\$111,550\\ =\$172,850\end{array}$