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Dan Watson started a small merchandising business in Year 1. The business experienced the following events...

Dan Watson started a small merchandising business in Year 1. The business experienced the following events during its first year of operation. Assume that Watson uses the perpetual inventory system.

  1. Acquired $33,000 cash from the issue of common stock.
  2. Purchased inventory for $26,400 cash.
  3. Sold inventory costing $15,600 for $30,000 cash.


Required
a. Record the events in a horizontal statement model. In the Cash Flow column, use OA to designate operating activity, IA for investment activity, FA for financing activity, and NC for net change in cash.
b. Prepare an income statement for Year 1 (use the multistep format).
c. What is the amount of total assets at the end of the period?

DAN WATSON MERCHANDISING
Effect of Events on Financial Statement
Event Assets = Stockholders’ Equity Revenue – Expenses = Net Income Statement of Cash Flows
Cash + Inventory = Common Stock + Retained Earnings
1. + = + – =
2. + = + – =
3a. + = + – =
3b. + = + – =
Total 0 + 0 = 0 + 0 0 – 0 = 0 0
DAN WATSON MERCHANDISING
Income Statement
For the Year Ended December 31, Year 1
0
Total assets

Solutions

Expert Solution

a.
The financial statement effect is shown below
DAN WATSON MERCHANDISING
Effect of Events on Financial Statement
Event Assets = Stockholders’ Equity Revenue – Expenses = Net Income Statement of Cash Flows
Cash + Inventory = Common Stock + Retained Earnings
1 $33,000 + = $33,000 + – = $33,000 FA
2 -$26,400 + $26,400 = + – = -$26,400 OA
3a. (Sale) $30,000 + = + $30,000 $30,000 – = $30,000 $30,000 OA
3b.(Cost) + -$15,600 = + -$15,600 – $15,600 = -$15,600 $0 NA
Total $36,600 + $10,800 = $33,000 + $14,400 $30,000 – $15,600 = $14,400 $36,600
In part 3a, the sale of goods is recognized and in 3b the cost of goods sold which is expense
b.
Income statement is shown below
Income statement
Revenue $30,000
Less: Expenses $15,600
Net income $14,400
c.
Total assets would be equal to cash plus inventory
Total assets 36600+10800
Total assets $47,400

ekkarill92 answered 2 years ago
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