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Maynard Case 2
Maynard Case 2
11192895
CASE 3-1
Diane Maynard was grateful for the balance sheets that her friend prepared [see Case2-1, Maynard
Company (A)]. In going over the numbers, she remarked “It’s sort of surprising that cash increased by
$31,677, but net income was only $19,635. Why was that?”
Her friend replied “A partial answer to that question is to look at an income statement for June.
I think I can find the data I need to prepare one for you”
In addition to the data given in the (A) case, her friend found a record of cash receipts and
disbursements,
disbursements, which is summarized in Exhibit 1. She also learned that all accounts payable were to
vendors for purchase of merchandise inventory and that cost of sales was $39,345 in June.
Questions:
1. Prepare an income statement for June in proper format. Explain the derivation of each item on
this statement, including cost of sales.
2. Explain why the change in the cash balance was greater than the net income.
3. Explain why the following amounts are incorrect cost of sales amounts for June: (a) $14,715 and
(b) $36,030. Under what circumstances would these amounts be correct cost of sales amounts?
Exhibit 1:
Reconciliation:
Cash Balance, June 1 $ 34,983
Receipts 98,783
Subtotal $ 133,766
Disbursements 67,106
Cash Balance, June 30 $ 66,660
MAYNARD COMPANY
Income Statement
For the period June 30
Sales $70,925
Less: Cost of Sales 39,345
Gross Margin 31,580
Expenses:
Wages 5,888
Utilities 900
Supplies 600
Insurance 324
Depreciation 2,574
Miscellaneous 135 10,421
Income before taxes 21,159
Income tax expense 1,524
Net Income $19,635
Note 1- Sales
Total 65,865
Note 3 - Wages
Wages 5,660
5,888
Note 4 - Supplies
600
Note 5 - Insurance
324
Note 6 - Depreciation
Equipment 624
Building 1,950
2,574
Income tax
1,524
2) There were cash transactions which increased cash but have no effect in the net income:
3) a. $14,715 is just the cash purchases of additional merchandise. Cash purchases will be equal to
cost of sales if only there’s only cash purchases and in which the beginning and ending balance
of merchandise inventor are the same.
b. $36,030 is just the sum of cash and credit purchases. Purchases will be treated as cost of
sales only if the beginning and ending balance of merchandise inventory are the same.