Accounting in Merchandising Companies

6.4. T-accounts of transactions for the second illustration of accounting for inventory

It is time to transfer the amounts to T-accounts:

Illustration 11: T-accounts of transaction for illustration #2

Assets		=	Liabilities		+	Equity
Cash			Accounts Payable			Contributed Capital
Beg. 9,600				Beg. 0			Beg.12,000
(8) 3,430	(5) 400 (3b) 4,606		(2) 300 (3a) 94 (3b) 4,606	(1) 5,000			Bal. 12,000

Bal. 8,024
				Bal. 0		Retained Earnings
Merchandise Inventory							Beg. 2,800
Beg. 5,200							(cl.) 1,280
(1) 5,000 (6b) 250	(2) 300 (3a) 94 (4b) 2,000						Bal. 4,080


Bal. 8,056						Sales Revenue
							Beg. 0
						(6a) 500 (7) 70 (cl.) 3,430	(4a) 4,000
Accounts Receivable
Beg. 0
(4a) 4,000	(6a) 500 (7) 70 (8) 3,430						Bal. 0


Bal. 0						Cost of Goods Sold
						Beg. 0
						(4b) 2,000	(6b) 250 (cl.) 1,750
						Bal. 0


						Transportation-out
						Beg. 0
						(5) 400	(cl.) 400
						Bal. 0


			Totals
Assets 16,080			=	Liabilities 0		+	Equity 16,080

6.5. Financial statements for the second illustration of accounting for inventory

Finally, financial statements prepared for 20X6 and 20X7 are shown below.

Illustration 12: Financial statements for Dav's books for 20X6 and 20X7

Dav's Books Income Statement For the Period Ended 20X6 and 20X7
	For the Period Ended 20X6	For the Period Ended 20X7
Net Sales	$5,500	$3,430
Cost of Goods Sold	(2,000)	(1,750)
Gross Margin	$3,500	$1,680
Less: Operating Expense Transportation-out Selling Expense	(300) (400)	(400) 0
Operating Income	$2,800	$1,280
Non-Operating Items	0	0
Net Income	$2,800	$1,280

Dav's Books Balance Sheet Periods Ended 20X6 and 20X7
	Period Ended 20X6	Period Ended 20X7
Assets Cash Accounts Receivable Merchandise Inventory	$9,600 0 5,200	$8,024 0 8,056
Total Assets	$14,800	$16,080

Liabilities Accounts Payable	$ 0	$ 0
Total Liabilities	$ 0	$ 0

Equity Contributed Capital Retained Earnings	$12,000 2,800	$12,000 4,080
Total Equity	$14,800	$16,008

Total Liabilities and Equity	$14,800	$16,080

Dav's Books Statement of Changes in Equity Periods Ended 20X6 and 20X7
	Period Ended 20X6	Period Ended 20X7
Beginning Contributed Capital Plus: Capital Acquisition	$ 0 12,000	$12,000 0
Ending Contributed Capital	$12,000	$12,000

Beginning Retained Earnings Plus: Net Income Less: Distributions	$ 0 2,800 0	$2,800 1,280 0
Ending Retained Earnings	$2,800	$4,080

Total Equity	$14,800	$16,080

Dav's Books Statement of Cash Flows For Periods Ended 20X6 and 20X7
	For Period Ended 20X6	For Period Ended 20X7
Cash Flows from Operating Activities Cash Receipts from Sales Revenue Cash Payments for Expenses	$5,500 (4,900)	$3,430 (5,006)
Net Cash Flow from Operating Activities	$600	(1,576)

Net Cash Flow from Investing Activities	$ 0	$ 0

Cash Flows from Financing Activities Cash Receipts from Capital Contribution	$9,000	$ 0
Net Cash Flows from Financing Activities	$9,000	$ 0

Net Change in Cash Plus: Beginning Cash Balance	$9,600 0	(1,576) 9,600
Ending Cash Balance	$9,600	$8,024

You can determine what is included in the cash flow amounts by reviewing transaction explanations provided earlier and noting what type of cash flows (operating, financing, or investing) they represent.

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