Questions:

1. What are the Accounting Principles behind this case?

2. Give conclusions and recommendation in this case.

Maynard Company (B) Diane Maynard was grateful for the balance sheets/Statement of Financial Position (per Case 2, Maynard Company A) that her friend prepared. In going over the numbers, she remarked, its sort of surprising that cash increased by P31,677, but net income was only P19,635. Why was that? Her friend replied, A partial answer to that question is to look at an income statement for June. I think I can find the data I need to prepare one for you. In addition to the data given in Case 2 (Maynard Company A), her friend found a record of cash receipts and disbursements, which is summarized in Exhibit 1. She also learned that all accounts payable were to vendors for purchase of merchandise inventory and that cost of sales was P39,345 in June.

Exhibit 1 Cash Receipts and Disbursements

Cash Receipts and Disbursements
Month of June
Cash Receipts		Cash Disbursements
Cash Sales	P44,420	Equipment purchased	P23,400
Credit Customers	21,798	Other assets purchased	408
Diane Maynard	11,700	Payments on accounts payable	8,517
Bank loan	20,865	Cash purchases of merchandise	14,715
Total	P98,783	Cash purchase of supplies	1,671
		Dividends	11,700
		Wages Paid	5,660
		Utilities paid	900
		Miscellaneous payments	135
			P67,106
Reconciliation:
Cash balance, June 1	P34,983
Receipts	98,783
Sub-total	P133,766
Disbursements	67,106
Cash balance, June 30	P66,660

HOWARD COMPANY Income Statement, June
Sales (44,420 cash sales + 26,505 credit sales)...................................................................................................................................................................................				70,925
Less: Cost of sales *.............................................................................................................................................................................				39,345
Gross Margin...................................................................................................................................................................................				31,580
Expenses
Wages(5,660+2,2021,974).............................................................................................................................................................................		5,888
Utilities.............................................................................................................................................................................		900
Supplies (5,559+1,6716,630).............................................................................................................................................................................		600
Insurance(3,1502,826).............................................................................................................................................................................		324
Depreciation (157,950156,000)+(5,9285,304).............................................................................................................................................................................		2,574
Miscellaneous.............................................................................................................................................................................		135		10,421
Income before income tax...................................................................................................................................................................................				21,159
Income tax expense (7,224 5,700).............................................................................................................................................................................				1,524
Net Income...................................................................................................................................................................................				19,635
Less: Dividends.............................................................................................................................................................................				11,700
Increase in retained earnings...................................................................................................................................................................................				7,935
*Cost of sales:
Merchandise purchased for cash.............................................................................................................................................................................		14,715
Merchandise purchased on credit.............................................................................................................................................................................		21,315	[21,315+(8,5178,517)]
Inventory, June 1.............................................................................................................................................................................		29,835
Total goods available during June.......................................................................................................................................................................		65,865
Inventory, June 30............................................................................................................................................................................. .............................................................................................................................................................................		26,520
Cost of Sales.......................................................................................................................................................................		39,345

Question 2

This question brings out the difference between cash accounting and accrual accounting. Cash increased by 31,677 whereas net income was 19,635.

1. The bank loan, a financing transaction, increased cash by 20,865 but did not affect net income. Cash collected on credit sales made last period (21,798) also increased cash, but did not affect net income this period. (The same is true of the collection of the 11,700 note receivable from Diane Howard, but it was offset by the payments of the 11,700 dividend to Diane Howard, the sole shareholder.)

1. The purchase of equipment (23,400) and other assets (408) decreased cash but did not affect net income (at least not by this full amount) this period.

2. Credit sales made this period (26,505) increased net income, but did not affect cash.

3. Noncash expenses such as depreciation (2,574) and insurance (324) decreased net income but did not affect cash as they relate largely, if not wholly, to cash outflows made for asset acquisition in prior periods. (Exception: such expenses on an entitys first income statement are not related to prior period expenditures but they will be a much smaller amount than the first accounting periods expenditures.

Question 3

(a) 14,715 is incorrect because it is the amount of cash purchases rather than the cost of sales. The cost of cash purchases and cost of sales amounts would be equal for a period in which all purchases were for cash, and in which the dollar amount of beginning inventory was the same as the dollar amount of ending inventory, since Cost of Sales = Beginning Inventory + Purchases Ending Inventory.

(b) 36,030 is the sum of cash purchases (14,715) and credit purchases (21,315). As explained above, purchases equal cost of sales for the period only if beginning and ending inventory amounts are the same.