Question

To support herself while attending school, Daun Deloch sold stereo systems to other students. During the first year of operations, Daun purchased the stereo systems for $210,000 and sold them for $320,000 cash. She provided her customers with a one-year warranty against defects in parts and labor. Based on industry standards, she estimated that warranty claims would amount to 2 percent of sales. During the year, she paid $3,520 cash to replace a defective tuner.

Required:

Prepare an income statement and statement of cash flows for Daun’s first year of operation. Based on the information given, what is Daun’s total warranties liability at the end of the accounting period?

Answer 1

Daun's income statement shows a net income of $100,080 with revenues of $320,000, cost of goods sold of $210,000, and warranty expenses accounting for $6,400. The cash flow statement has a net cash flow from operating activities of $106,480. The total warranties liability at the end of the accounting period is $2,880, after accounting for actual expenses paid.

Step-by-step explanation:

Income Statement for Daun’s Business Operations

Revenue: $320,000 (Sales)

Less: Cost of Goods Sold: $210,000

Gross Profit: $110,000

Less: Warranty Expense (2% of $320,000): $6,400

Less: Actual Warranty Costs Paid: $3,520

Net Income: $100,080

Statement of Cash Flows for Daun’s First Year of Operation

Cash Received from Sales: $320,000

Cash Paid for Inventory: -$210,000

Cash Paid for Warranty Costs: -$3,520

Net Cash Flow from Operating Activities: $106,480

The total warranties liability at the end of the accounting period is calculated based on the estimated warranty claims which is 2% of sales. Therefore, it amounts to $6,400, out of which $3,520 has already been paid, leaving a remaining warranty liability of $2,880 at the end of the year.

Answer 2

Daun Deloch's income statement shows a net income of $103,600 after accounting for sales, cost of goods sold, and warranty expenses. The statement of cash flows shows net cash flows from operating activities of $106,480. The total warranties liability at the end of the year is $2,880.

Step-by-step explanation:

Income Statement for Daun Deloch's First Year

Sales Revenue: $320,000

Cost of Goods Sold (COGS): $210,000

Gross Profit: $320,000 - $210,000 = $110,000

Warranty Expense (2% of sales revenue): $320,000 x 2% = $6,400

Total Expenses: $6,400

Net Income: $110,000 - $6,400 = $103,600

Statement of Cash Flows for Daun Deloch's First Year

Cash inflows from Sales: $320,000

Cash outflows for COGS: $210,000

Cash outflows for Warranty Claims Paid: $3,520

Net Cash Flows from Operating Activities: $320,000 - $213,520 = $106,480

Daun's total liabilities for warranties at the end of the period consist of the total estimated warranty expense of $6,400 minus the actual expenses paid of $3,520, leaving a liability of $2,880 (unpaid warranty expenses).