The beginning account balances for Terry’s Auto Shop as of January 1, Year 2, follow:

Account Titles Beginning                                                     Balances
Cash .......................................................................................$16,000
Inventory ...................................................................................8,000
Common stock ........................................................................20,000
Retained earnings ....................................................................4,000

The following events affected the company during the Year 2 accounting period:
1. Purchased merchandise on account that cost $15,000.
2. The goods in Event 1 were purchased FOB shipping point with freight cost of $800 cash.
3. Returned $2,600 of damaged merchandise.
4. Agreed to keep other damaged merchandise for which the company received a $1,100 allowance.
5. Sold merchandise that cost $15,000 for $31,000 cash.
6. Delivered merchandise to customers in Event 5 under terms FOB destination with freight costs amounting to $500 cash.
7. Paid $8,000 on the merchandise purchased in Event 1.

Required
a. Organize appropriate ledger accounts under an accounting equation. Record the beginning balances and the transaction data in the accounts.
b. Prepare an income statement and a statement of cash flows for Year 2.
c. Explain why a difference does or does not exist between net income and net cash flow from operating activities.