Question

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. Acquired $25,000 cash from the issue of common stock. Purchased inventory for $20,000 cash. Sold inventory costing $18,600 for $32,500 cash. Required a. Record the events in general journal format. b. Post the entries to T-accounts. c. Determine the amount of gross margin. d. What is the amount of net cash flow from operating activities for Year 1?

Answer 1

a. Records of events in journal format:

No. Particulars Debit Credit

1. Cash 25000

Common Stock 25000

(Being issuance of common stock recognize)

2. Inventory 20000

Cash 20000

(Being inventory purchased)

3. Cash 32500

Sales 32500

(Being Inventory Sold)

4. Cost of Goods Sold 18600

Inventory 18600

(Being cost of inventory sold recorded)

b. T-Account

Particulars Debit Particulars Credit

Cash 25000 Common stock 25000 Inventory 20000 Cash 20000

Cash 32500 Sales 32500

COGS 18600 Inventory 18600

Total 96100 Total 96100

c.   Amount of Gross Margin

Gross Margin=Sales- Cost of Goods Sold

=32500-18600

=13900

d. Net cash flow from operating activity

  Cash Sales 32500

Less: COGS 18600

Less: Closing Inventory(20000-18600) 1400

Net cash Flow from Operating   

Activitiy 12500   

Note: Issue of Common Stock is a financing Activity=$25000

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