Exercise 4-16B Effect of sales returns and allowances and transportation costs on the financial statements: perpetual system McDowell Company began the Year 3 accounting period with $50,000 cash, $72,000 inventory, $55,000 common stock, and $67,000 retained earnings. During Year 3, McDowell experienced the following events: 1. Sold merchandise costing $52,000 for $85,700 on account to Anderson Sporting Goods. 2. Delivered the goods to Anderson under terms FOB destination. Transportation costs were $600 cash. 3. Received returned goods from Anderson. The goods cost McDowell $7,000 and were sold to Anderson for $9,200. 4. Granted Anderson a $2,000 allowance for damaged goods that Anderson agreed to keep. 5. Collected partial payment of $68,000 cash from accounts receivable. Required a. Record the events in a horizontal financial statements model like the one shown next. Balance Sheet Assets Stk. Equity Income Statement Cash + Accts. Rec. + Inv. Com. Stk. + Ret. Earn. Rev. Exp. Net Inc. b. Prepare an income statement, a balance sheet, and a statement of cash flows. c. Why would Anderson agree to keep the damaged goods? Who benefits more? Statement of Cash Flows McDowell Company Effect of Events on the Financial Statements Assets No. Cash + Bal. 50,000+ 1a. NA+ A. Rec. + Inv. NA + 72,000 85,700+ NA Equity =C. Stock +Ret. Earn. Rev. Exp. Net. Inc. Cash Flow 55,000+ 67,000 NA NA= NA NA = NA+ 85,700 85,700 NA= 85,700 NA 1b. 2. 3a. 3b. 4. 5. Tot. 117,400 + b. Net Sales McDowell Company Financial Statements Income Statement For the Year Ended December 31, Year 3 Operating Expenses: Net Income Assets: Balance Sheet As of December 31, Year 3 Total Assets Liabilities: Stockholders' Equity: Total Stockholders' Equity $150,900 Total Liabilities and Stockholders' Equity $150,900 McDowell Company Financial Statements For the Year Ended December 31, Year 3 Statement of Cash Flows Cash Flows From Operating Activities: Net Cash Flow from Operating Activities: Cash Flows From Investing Activities: Cash Flows From Financing Activities: Net Change in Cash Plus: Beginning Cash Balance Ending Cash Balance $117,400 c. Anderson may agree to keep the damaged goods for several reasons as follow: This arrangement can benefit