To support himself while attending school, Devon James sold computers to other students. During the year Devon purchased computers for $150,000 and sold them for $280,000 cash. He provided his customers with a one-year warranty against defects in parts and labor. Based on industry standards, he estimated that warranty claims would amount to 5 percent of sales. During the year he paid $1,545 cash to replace a defective hard drive.
a. Prepare the journal entries to record the
(1) Purchase of inventory.
(2) Sale of computers.
(3) Warranty expense.
(4) Payment for repairs.
b. Post the above transactions to T-accounts.
c. Prepare an income statement and statement of cash flows for Devon’s first year of operation.
d. Explain the difference between net income and the amount of cash flow from operating activities.