Question

To support herself while attending school, Daun Deloch sold stereo systems to other students. During the first year of operations, Deloch purchased the stereo systems for $140,000 and sold them for $250,000 cash. She provided her customers with a one-year warranty against defects in parts and labor. Based on industry standards, she estimated that warranty claims would amount to 2 percent of sales. During the year, she paid $2,820 cash to replace a defective tuner. Required a-1. Prepare an income statement for Deloch’s first year of operation. a-2. Prepare a statement of cash flows for Deloch’s first year of operation.

Answer 1

Answer:

sales revenue    250,000

COGS                 (140,000)

gross profit          90,000

warranty expense (5,000)

net income            85,000

==============================

collection from customer 250,000

paid to suppliers              (140,000)

warranty payment               (2,820)

net cash flow                     107, 180‬

Explanation:

bot will enter the revenue/colelction and COGS/payment at the sme value as this operation were on cash.

the difference wll be in the warranty.

the cash flow will only consider the payment

while the net income will recognzie an expense based on te expected warranty liability.

warranty liaibility/expense

250,000 x 2% = 5,000