A. Prepare an Income Statement
B. Explain the derivation of each item on the statement, including cost of sales.
The above statement shows the following:
Total Cash sales of $44,420 at the end of the month
Additional cash: from bank loan ($20,865), from cash collected on credit sales made last period ($21,798), and the collection of the $11,700 note receivable from Diane Maynard, but it was offset by the payments of the $11,700 dividend to Diane Maynard, the shareholder.
The purchase of equipment ($23,400) and other assets ($408) decreased cash but did not affect net income (at least not by this full amount) this period.
Utilities ($900), Wages ($5,660) and Miscellaneous payments ($135) decreased cash as these are fixed operational costs.
Credit sales made this period ($26,505) increased net income, but will not affect cash.
Noncash expenses such as depreciation ($2,574) and insurance ($324) will be deducted in the net income but will not affect cash as they relate largely, if not wholly, to cash outflows made for asset acquisition in prior periods. (Exception: such expenses on an entity’s first income statement are not related to prior period expenditures but they will be a much smaller amount than the first accounting period’s expenditures)
To compute for the Cost of Sales, we need to sum the beginning inventory and cost of purchase, and deduct the ending inventory for the month.
A. Explain why the change in the cash balance was greater than the net income.
The change in cash balance was greater than net income as there are certain transactions in the income statement that do not affect cash balance/the balance sheet, and vice versa. The transactions that affected the income statement but did not affect cash are revenues recognized from credit sales, depreciation, amortization of prepaid insurance,...