Question

To support herself while attending school, Daun Deloch sold stereo systems to other students. During the...

To support herself while attending school, Daun Deloch sold stereo systems to other students. During the first year of operations, Daun purchased the stereo systems for $250,000 and sold them for $360,000 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 3 percent of sales. During the year she paid $3,920 cash to replace a defective tuner.

Required

Prepare an income statement and statement of cash flows for Daun’s first year of operation. (Statement of Cash Flows only, items to be deducted must be indicated with a negative amount.)

DAUN'S STEREOS

Income Statement

DAUN'S STEREOS

Statement of Cash Flows

Cash flow from operating activities:

Net cash flow from operating activities

Cash flows from investing activities

Cash flows from financing activities

Net change in cash

Ending cash balance

What is Daun’s total warranties liability at the end of the accounting period?

  
Business   Accounting   
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Answer #1

Solution:

Daun's Stereos
Income Statement
Particulars Amount
Sales Revenue $360,000.00
Cost of goods sold $250,000.00
Gross Profit $110,000.00
Warranty Expense ($360,000*3%) $10,800.00
Net Income $99,200.00
DAUN'S STEREOS
Statement of Cash Flows
Cash flow from operating activities:
Collection from Sales $360,000.00
Payments for purchases -$250,000.00
Warranty payments -$3,920.00
Net cash flow from operating activities $106,080.00
Cash flows from investing activities $0.00
Cash flows from financing activities $0.00
Net change in cash $106,080.00
Beginning cash balance $0.00
Ending cash balance $106,080.00

Daun's total warranty liability at the end of the accounting period = Warranty expense - Warrant payment

= $10,800 - $3,920 = $6,880

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