Question

At the beginning of 2018, the Redd Company had the following balances in its accounts:

  

Cash	$	8,300
Inventory		2,300
Common stock		7,800
Retained earnings		2,800

  

During 2018, the company experienced the following events:

1. Purchased inventory that cost $5,800 on account from Redd Company under terms 2/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $530 were paid in cash.

2. Returned $300 of the inventory that it had purchased because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Redd Company within the cash discount period.

4. Sold inventory that had cost $6,300 for $9,300 on account, under terms 2/10, n/45.

5. Received merchandise returned from a customer. The merchandise originally cost $530 and was sold to the customer for $830 cash. The customer was paid $830 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $630 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Took a physical count indicating that $2,000 of inventory was on hand at the end of the accounting period.

c-1. Prepare a multistep income statement.

	REDD COMPANY Income Statement For the Year Ended December 31, 2018 Net Sales Cost of Goods Sold Gross Margin Operating expenses Transportation-out Net Income

c-2. Prepare a statement of changes in stockholders’ equity.

	REDD COMPANY Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2018 Beginning common stock Plus: Stock Issued Ending common stock Beginning retained earnings Plus: Net Income Ending retained earnings Total stockholders’ equity

c-3. Prepare a balance sheet.

	REDD COMPANY Balance Sheet As of December 31, 2018 Assets Cash Merch. Inventory Total assets Liabilities Stockholders’ Equity Common Stock Retained Earnings Total stockholders’ equity Total liabilities and stockholders’ equity

Prepare a statement of cash flows. (Enter cash outflows as negative amounts.)

	REDD COMPANY Statement of Cash Flows For the Year Ended December 31, 2018 Cash flows from operating activities Inflow from customers Outflow for expenses Outflow for inventory Net cash flow from operating activities Cash flows from investing activities Cash flows from financing activities Net change in cash Plus: Beginning cash balance Ending cash balance

Answer 1

c-1.

REDD COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31 , 2018

NET SALES $8470

LESS COST OF GOODS SOLD ($5800)

GROSS MARGIN $2670

LESS OPERATING EXPENSES ($59.4)

LESS TRANSPORTATION OUT    ($1160)

NET INCOME $1450.6

C-2

REDD COMPANY

STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

FOR THE YEAR ENDED DECEMBER 31 , 2018

BEGINNING COMMON STOCK $7800

PLUS; STOCK ISSUED NIL

ENDING COMMON STOCK $7800

BEGINNING RETAINED EARNINGS $2800

PLUS: NET INCOME $1450.6

ENDING RETAINED EARNINGS $4250.6

TOTAL STOCK HOLDER'S EQUITY $12050.6

C-3

REDD COMPANY

BALANCE SHEET

AS OF DECEMBER 31, 2018

ASSETS

CASH ($8300+8470-5500-59.4-1160) $10050.6

MERCHANDISE INVENTORY $2000

TOTAL ASSETS $12050.6

LIABILITIES

STOCKHOLDER'S EQUITY

COMMON STOCK $7800

RETAINED EARNINGS $4250.6

TOTAL LIABILITIES AND STOCK HOLDER'S EQUITY $12050.6

C-4

REDD COMPANY

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2018

CASH FLOWS FROM OPERATING ACTIVITIES

INFLOW FROM CUSTOMERS

NET SALES $8470

ADD DISCOUNT RECEIVED ON PURCHASE $110

OUTFLOW FOR EXPENSE

PURCHASE ($5500)

ADD DISCOUNT ALLOWED ON SALES ($169.4)

ADD FREIGHT (530+630) ($1160)

($6829.4)

NET CASH FLOW FROM OPERATING ACTIVITIES $1750.6

CASH FLOW FROM INVESTING ACTIVITIES NIL

CASH FLOW FROM FINANCING ACTIVITIES NIL

NET CHANGE IN CASH $1750.6

PLUS: BEGINNING CASH BALANCE $8300

ENDING CASH BALANCE $10050.6

WORKINGS:

1. NET SALES = SALES - SALES RETURNS

= $9300-$830 = $8470

2. PURCHASE = PURCHASE - PURCHASE RETURNS

= $5800 -$300 =$5500

3. OPERATING EXPENSE = DISCOUNT ALLOWED - DISCOUNT RECEIVED

DISCOUNT ALOOWED = 8470*2%= $169.4

DISCOUNT RECEIVED = 5500*2%= $110

OPERATING EXPENSE = $169.4 - $110 = $59.4