Chapter 5: Problem 5-7

Problem 5-7 Purchases and Sales of Merchandise, Cash Flows

Two-Wheeler, a bike shop, opened for business on April 1. It uses a periodic inventory system. The following transactions occurred during the first month of business:

April 1:Purchased five units from Duhan Co. for $500 total, with terms 3/10, n/30, FOB destination.

April 10:Paid for the April 1 purchase.

April 15:Sold one unit for $200 cash.

April 18:Purchased ten units from Clinton Inc. for $900 total, with terms 3/10, n/30, FOB destination.

April 25:Sold three units for $200 each, cash.

April 28:Paid for the April 18 purchase.

Required

1.For each of the preceding transactions of Two-Wheeler, prepare the appropriate journal entry.

2.2.Determine net income for the month of April. Two-Wheeler incurred and paid $100 for rent and $50 for miscellaneous expenses during April. Ending inventory is $967. (Ignore income taxes.)

3.3.Assuming that these are the only transactions during April (including rent and miscellaneous expenses), compute net cash flow from operating activities.

4.4.Explain why cash outflow is so much larger than expenses on the income statement.