Question

Fred Gowen opened Gowen Retail Sales as a sole proprietorship and recorded the following transactions during his first month in business:

1. Purchased $50,000 of fixed assets, putting 20% down and borrowing the remainder.
2. Sold 1,000 units of product at an average price of $45 each. Half of the sales were on credit, none of which had been collected as of the end of the month.
3. Recorded cost of goods sold of $21,000 related to the above sales.
4. Purchased $32,000 worth of inventory and paid cash.
5. Incurred other expenses (including the interest from the loan) of $5,000, all of which were paid in cash.
6. Fred's tax rate is 40%. (Taxes will be paid in a subsequent period.)
      

Cash Flows
Purchase of Assets	$
Proceeds from Loan	$
Cash from Sales	$
Purchase of Inventory	$
Other Expenses	$
Net Cash Flow	$

1. What will the business report as net income for its first month of business? (Hint: Write out an income statement and enter revenue, cost, and expense. Then calculate tax and net income.)
   $  
   
2. List the flows of cash in and out of the business during the month. Show inflows as positives and outflows as negatives (using sign "-"). Sum to arrive at a "Net Cash Flow" figure.
   
3. Should Fred pay more attention to net income or cash flow?

Answer 1

a)
	Income Statement
	Sales Revenue		$ 45,000.00
Less:	Cost of Goods sold		$ 21,000.00
	Gross Margin		$ 24,000.00
Less:	Other Expenses		$   5,000.00
	Income before taxes		$ 19,000.00
Less:	Income tax @ 40%		$   7,600.00
	Net Income		$ 11,400.00

b)
	Cash Flows
	Purchase of Assets			$ -10,000.00
	Proceeds from Loan			$                 -
	Cash from Sales			$ 22,500.00
	Purchase of Inventory			$ -32,000.00
	Other Expenses			$   -5,000.00
	Net Cash Flow			$ -24,500.00

c)	Fred should pay more attention to cash flow as it is in negative