EXERCISE 3-7B SOLUTION b. Austin's Auto Shop Financial Statements For the Year Ended December 31, Year 3 Income Statement Exercise 3-7B Effect of purchase returns and allowances and freight costs on the financial statements: Perpetual system The beginning account balances for Austin's Auto Shop as of January 1, Year 3, follows: The following events affected the company during the Year 3 accounting period: 1. Purchased merchandise on account that cost $12,000. 2. The goods in Event 1 were purchased FOB shipping point with freight cost of $800 cash. 3. Returned $2,600 of damaged merchandise for credit on account. 4. Agreed to keep other damaged merchandise for which the company received an $1,100 allowance. 5. Sold merchandise that cost $12,000 for $21,500 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 3. c. Explain why a difference does or does not exist between net income and net cash flow from operating activities