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Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.

1. 1) The company purchased $12,100 of merchandise on account under terms 3/10, n/30.
2. 2) The company returned $1,600 of merchandise to the supplier before payment was made.
3. 3) The liability was paid within the discount period.
4. 4) All of the merchandise purchased was sold for $18,200 cash.

1. What effect will the return of merchandise to the supplier in event (2) have on Darlington’s financial statements?

A. Assets and stockholders’ equity decrease by $1,600.

B. Assets and liabilities decrease by $1,552.

C.Assets and liabilities decrease by $1,600.

D. None. It is an asset exchange transaction.

2. What is the gross margin that results from these four transactions?

A. 8,015

B. 6,100

C. 5,917

D. 8,063

3. What is the net cash flow from operating activities as a result of the four transactions?

1. 9,015

B. 5,917

C. 8,063

D. 6,100

Answer 1

1) When Company returned merchandise then assets decrease because inventory will decrease by return amount and liabilities will also be decrease because account payable is also decrease by Return amount

So answer is c) Assets and liabilities decrease by $1600

2) Cost of goods sold = (12100-1600)*97% = 10185

Gross margin = Net Sales-Cost of goods sold = 18200-10185 = 8015

So answer is a) $8015

3) Calculate following

Cash flow from operating activities
Cash received from customer	18200
Less: Cash paid to supplies (12100-1600)*97%	-10185
Net cash flow from operating activities	8015