BASIC ACCOUNTING

Lecture Week 8

FINANCIAL STATEMENTS OF A MERCHANDISING OPERATION

Illustration: Toribio Cayanan Tires have just started its operation entered into the following
transactions during the month of June 2019:

June 2 Toribio Cayanan invests P1,000,000 to his Toribio Cayanan Tires.

2 Purchased 1,000 tires at a cost of P600 per tire. Terms of payment: 1/10, net 45.
4 Paid trucking firm to ship the tires purchased on June 2.
5 Purchased 600 tires at a cost of P600 per tire. Terms of payment: 2/10, net 30.
6 Paid trucking firm P5,000 to ship the tires purchased on June 5.
7 Returned 150 of the tires purchased on June 2 because they were defective.
Received a credit on open account from the seller.
11 Paid for tires purchased on June 2.
13 Sold 700 tires purchased from those purchased on June 2. The selling price was
P900 per tire. Terms: 1/10, net 30.
22 Received cash from sale of tires on June 13.
30 Paid for tires purchased on June 5.
30 Paid rent for the month, P5,000.
30 Paid utilities for the month, P9,000.
30 Paid monthly salaries of staff, P10,500.

Step 1: Journalizing

For Periodic Inventory System:

DATE ACCOUNTS TITLES DEBIT CREDIT

Jun 2 Cash P 1,000,000.00

T. Cayanan, Capital P 1,000,000.00
To record capital investment of Toribio Cayanan.

2 Purchases 600,000.00
Accounts Payable 600,000.00
To record purchase of Inventory (P600 x 1,000 tires).

4 Transportation In 8,000.00
Cash 8,000.00
To record transportation in.

5 Purchases 360,000.00
Accounts Payable 360,000.00
To record purchase of Inventory (P600 x 600 tires).

6 Transportation In 5,000.00
Cash 5,000.00
To record transportation in.

7 Accounts Payable 90,000.00

Purchase Returns and Allowances 90,000.00
To record returns of defective purchases from June 2.

11 Accounts Payable 510,000.00

Cash 504,900.00
Purchase Discounts 5,100.00
To record payment of purchases from June 2 with 1% discount.
{(P600,000-P90,000 returned purchases)*.01}
 DATE ACCOUNTS TITLES DEBIT CREDIT

Jun 13 Accounts Receivables P 630,000.00

Sales P 630,000.00
To record sales of 700 tires at P900.

22 Cash 623,700.00
Sales Discount 6,300.00
Accounts Receivables 630,000.00
To record collections from June 13 sales with 1% discount.
(P630,000*.01)

30 Accounts Payable 360,000.00

Cash 360,000.00
To record payment of purchases from June 5.

30 Rent Expense 5,000.00

Cash 5,000.00
To record payment of rent.

30 Utilities Expense 9,000.00

Cash 9,000.00
To record payment of monthly utilities.

30 Salaries Expense 10,500.00

Cash 10,500.00
To record payment of monthly salaries.

Step 2: Posting
Step 3: Preparing Trial Balance

DEBIT CREDIT

Cash 721,300.00
Accounts Receivables -
Accounts Payable -
T. Cayanan, Capital 1,000,000.00
Sales 630,000.00
Sales Discount 6,300.00
Purchases 960,000.00
Purchase Discounts 5,100.00
Purchase Returns and Allowances 90,000.00
Transportation In 13,000.00
Rent Expense 5,000.00
Utilities Expense 9,000.00
Salaries Expense 10,500.00
1,725,100.00 1,725,100.00

Since no adjustments occurred, proceed to Step 6 Preparation of Financial Statements.

Step 6: Preparation of Financial Statements

STATEMENT OF FINANCIAL PERFORMANCE / INCOME STATEMENT

 TORIBIO CAYANAN TIRES
Income Statement
For the month ended June 30, 2019

Net Sales
Sales P 630,000.00
Less: Sales Discounts 6,300.00 P 623,700.00

Cost of Sales
Inventory, Beginning -
Add: Purchases P 960,000.00
Less: Purchase Returns and Allowances 90,000.00
Purchase Discounts 5,100.00
Add: Transportaion In 13,000.00
Net Purchases 877,900.00
Less: Inventory, End* 449,100.00 428,800.00
Gross Profit P 194,900.00

Less: Operating Expenses

Rent Expense 5,000.00
Utilities Expense 9,000.00
Salaries Expense 10,500.00 24,500.00
Net Income 170,400.00

Take note:

Computation of Ending Inventory using FIFO (First-In First Out Inventory Method):
First – In First –
Out method of
June 2 Purchases inventory valuation is a cost flow assumption that the first
Purchased inventory 1,000goods purchased are also the first
Less: Returned inventory 150goods sold. And therefore in our
illustration, the 700 tires sold on June 13
Sold inventory* 700
came from June 2 purchases.
150
Multiply: Cost
(P600 - (P600*1% discount)) P 594.00
Total Ending Inventory for June 2 P 89,100.00

June 5 Purchases
Purchased inventory 600
Less: Returned inventory -
Sold inventory* -
600
Multiply: Cost P 600.00
Total Ending Inventory for June 5 P 360,000.00
Total Ending Inventory P 449,100.00

June 2 June 5
Purchases 1,000 600
Returned (150)
Total inventory available for sale 850 600
Sold in June 13 (700) -
Ending Inventory in Quantity 150 600
STATEMENT OF FINANCIAL POSITION / BALANCE SHEET

STATEMENT OF CASH FLOWS

Cash Flow from Operating Activities:

Cash received from Customers 623,700.00
Payments to Suppliers (864,900.00)
Payments for Transportation In (13,000.00)
Payments to Employees (10,500.00)
Payments for Office Rent (5,000.00)
Payments for Utilities (9,000.00)
Net Cash flow from Operating Activities (278,700.00)

Cash Flow from Investing Activities:

Payments to acquire service vehicles -
Payments to acquire office equipment -
Net Cash flow from Investing Activities -

Cash Flow from Financing Activities:

Cash received as investments by the owner 1,000,000.00
Net Cash flow from Financing Activities 1,000,000.00

Net Increase/(Decrease) in cash 721,300.00

Cash balance at the beginning of the period -
721,300.00

STATEMENT OF CHANGES IN OWNER’S EQUITY

T. Cayanan, Capital, Beginning -

Initial Investments 1,000,000.00
Withdrawals -
Net Income 170,400.00
T. Cayanan, Capital, Ending 1,170,400.00