Professional Documents
Culture Documents
11192895
CASE 3-1
Maynard Company (B)
Diane Maynard was grateful for the balance sheets that her friend prepared [see Case2-1, Maynard
Company (A)]. In going over the numbers, she remarked Its sort of surprising that cash increased by
$31,677, but net income was only $19,635. Why was that?
Her friend replied A partial answer to that question is to look at an income statement for June.
I think I can find the data I need to prepare one for you
In addition to the data given in the (A) case, her friend found a record of cash receipts and
disbursements, which is summarized in Exhibit 1. She also learned that all accounts payable were to
vendors for purchase of merchandise inventory and that cost of sales was $39,345 in June.
Questions:
1. Prepare an income statement for June in proper format. Explain the derivation of each item on
this statement, including cost of sales.
2. Explain why the change in the cash balance was greater than the net income.
3. Explain why the following amounts are incorrect cost of sales amounts for June: (a) $14,715 and
(b) $36,030. Under what circumstances would these amounts be correct cost of sales amounts?
Exhibit 1:
Cash Receipts and Disbursements
Month of June
Cash Receipts Cash Disbursements
Cash Sales $ 44,420 Equipment purchased $ 23,400
Credit customers 21,798 Other Assets purchased 408
Diane Maynard 11,700 Payments on accounts payable 8,517
Bank Loan 20,865 Cash purchases of merchandise 14,715
Total receipts $ 98,783 Cash purchase of supplies 1,671
Dividends 11,700
Wages paid 5,660
Utilities paid 900
Miscellaneous payments 135
Total Disbursements $ 67,106
Reconciliation:
Cash Balance, June 1 $ 34,983
Receipts 98,783
Subtotal $ 133,766
Disbursements 67,106
Cash Balance, June 30 $ 66,660
MAYNARD COMPANY
Income Statement
For the period June 30
Sales
$70,925
Less: Cost of Sales
39,345
Gross Margin
31,580
Expenses:
Wages 5,888
Utilities 900
Supplies 600
Insurance 324
Depreciation 2,574
Miscellaneous 135 10,421
Income before taxes
21,159
Income tax expense
1,524
Net Income
$19,635
Note 1- Sales
Cash Sales
44,420
Credit Sales
26,505
Gross Sales
70,925
Note 2 - Cost of sales
Beginning Inventory
29,835
Purchases (cash)
14,715
Purchases (credit)
21,315
Total
65,865
Less: Ending Inventory
(26,520)
Cost of Sales
39,345
Note 3 - Wages
Wages
5,660
Wages Payable, June 30
2,202
Wages Payable, June 1
(1,974)
5,888
Note 4 - Supplies
Supplies, June 1
5,559
Cash purchase
1,671
Supplies, June 30
(6,630)
600
Note 5 - Insurance
Insurance, June 1
3,150
Insurance, June 30
(2,826)
324
Note 6 - Depreciation
Equipment
624
Building
1,950
2,574
Income tax
Taxes payable, June 30
7,224
Taxes payable, June 1
(5,700)
1,524
2) There were cash transactions which increased cash but have no effect in the net income:
a. Cash collected for sales on credit amounting to $ 21,798
b. Bank loan amounting to $ 20,865
c. Note receivable (Diane Maynard) amounting to $11,700 offset by payment to Diane
Maynard amounting to $11,700 as dividend being the sole shareholder of the company
3) a. $14,715 is just the cash purchases of additional merchandise. Cash purchases will be equal to
cost of sales if only theres only cash purchases and in which the beginning and ending balance
of merchandise inventor are the same.
b. $36,030 is just the sum of cash and credit purchases. Purchases will be treated as cost of
sales only if the beginning and ending balance of merchandise inventory are the same.