To support herself while attending school, Ellen Abba sold stereo systems to other students. During the first year of operation, she sold systems that had cost her $120,000 cash for $226,000 cash. She provided her customers with a one-year warranty against defects in parts. Based on industry standards, she estimated that warranty claims would amount to 5 percent of sales.

During the year she paid $920 cash to replace a defective tuner.

Required

a. Prepare an income statement and a statement of cash flows for Abba’s first year of operation.

b. Explain the difference between net income and the amount of cash flow from operating activities.