Case 3.

1:
1) Income Statement for June Month as below:
a) Sales Revenue: It will include both cash and credit sales. As per the receipt of
June month cash sales was $44,420 and accounts receivable (credit sale) was
$26,505(June 30 a/c receivable) + $21,798 (cash received from a/c
receivable) – $21,798 (June 1 a/c receivable) = $70,925
b) Cost of Goods sold: is (inventory Opening – inventory closing + inventory
purchased). Here it comes as $29,835 (opening) – $265,520 (closing) +
$14,715(inventory purchased by cash) + ($21,315 – $8,517 + $8,517)
(inventory purchased on account) = $39,345
c) Gross Margin: is the difference of sales revenues and cost of the good sold.
d) Supplies Expenses: is (supplies opening – supplies closing + supplies
purchased). Here it is $5,559 (opening) – $6,630 (closing) + $1,671(supplies
purchased by cash) = $600. There were no supplies purchased on account.

Maynard Company
Income Statement
For Month of June
Particulars Total($)
Sales Revenue 70925
Cost of Goods Sold 39345
Gross Margin 31580
Supplies Expenses 600
Wage Expenses 5888
Utilities Expenses 900
Depreciation Expenses(building and equipment) 2574
Insurance Expenses 324
Miscellaneous Expenses 135
Income before income taxes(IBIT) 21159
Income tax expenses 1524
Net Income 19635

e) Wage Expenses: will be the difference between accrued wages payable at

EOM and SOM + wages paid during this month. It comes as $2,202(accrued at
EOM) - $1,974 (accrued at SOM) + $5,660 (wages paid during the month) =
$5,888. There were no prepaid wage expenses otherwise we would have to
subtract that amount.
f) Utilities Expense: As per the case receipts $900 was expense for utilities.
There is no opening and closing balance as well as credit purchase of utilities.
 g) Depreciation Expenses: It includes both building and equipment depreciation
expenses. It was calculated on the basis of accumulated depreciation
difference at EOM and SOM.
h) Insurance Expenses: Difference of prepaid insurance at SOM and EOM will
result in the insurance expenses for month June.
i) Miscellaneous Expenses: are shown in the cash receipt for month of June so
will come into the income statement as is.
j) Income before income taxes (IBIT): is calculated by taking the difference of
all the operating expenses from gross margin.
k) Net Profit: is the difference between the IBIT and income taxes paid.

2) Explanation of the difference between cash balance and net income: Net income for a
particular period is the difference between the sales revenue and (cost of the good sold
+ operating expenses + income taxes). It does not matter if business got the cash for
revenues or did not pay for the purchases/operating expenses/income taxes during the
period when these were realized. These unpaid expenses/accrued wages/ accounts
payable and accounts receivable will be shown in the balance sheet as per the nature
but income sheet.
For example in June month Maynard Company got the $20,865 cash from bank loan but
it will not be shown in the income sheet but balance sheet as liability. Same goes for the
other transactions also resulting in the difference between net income and increased
cash during June period.

3) Incorrect amount of cost of goods sold:

a) $14,175 – this was the just cash purchase of merchandise but the cost of
sales is (inventory Opening – inventory closing + inventory purchased both
cash and on account). So we will not just take $14,175 as cost of sale.
b) $36,030 – this was just the inventory purchase both on cash and credit but
did not include the difference of inventory opening and closing so we can not
take it as cost of sales either.