TITLE: Maynard Company Case 3-1
BACKGROUND:
Upon seeing the balance sheet in Case 2-1, Diane Meynard was surprised that cash increased by $31,677 but net income was only S19,635. Her friend will prepare an income statement to find out why and her friend found a record of cash receipts and disbursements. She also learned that all accounts payable were to vendors for purchase of merchandise inventory and the cost of sales was $39,345 in June.
STATEMENT OF THE PROBLEM
The cash increased by $31,677 but net income was only $19,635.
ALTERNATIVE COURSES OF ACTION
a. To check transactions that affected the income statement but not cash.
b. To find out whether Maynard Company uses accrual method or cash basis accounting
RECOMMENDATION
The change in cash balance was greater than net income as there are certain transactions in the income statement that do not affect cash balance/ the balance sheet, and vice versa. The transactions that affected the income statement but did not affect cash are the following: revenues recognized from credit sales, depreciation, amortization of prepaid insurance, and accrual of wages and taxes. On the other hand, the transactions that affected cash/ the balance sheet but did not affect net income are the following: availment of bank loans, declaration of dividends, payment of Diane Maynard’s loans to the company, purchase of equipment and other assets, and accounts payable.
CONCLUSION
a) $14,715 represents only the amount of merchandise purchased, and not the accrued amount for cost of goods sold. Note that Maynard’s Company uses the accrual method of accounting and not the cash basis method.
b) $36,030 is the amount of cash purchases plus purchases made on credit. It is not equal to cost of goods sold, since it does not take into consideration the beginning and ending amounts for inventory, given that $3,315 worth of inventories have