Fred Gowen opened Gowen Retail Sales as a sole proprietorship and recorded the following transactions during his first month in business:
(1) Purchased $50,000 of fixed assets, putting 10% down and borrowing the remainder.
(2) Sold 1,000 units of product at an average price of $45 each. Half of the sales were on credit, none of which had been collected as of the end of the month.
(3) Recorded cost of goods sold of $21,000 related to the above sales.
(4) Purchased $30,000 worth of inventory and paid cash.
(5) Incurred other expenses (including the interest from the loan) of $5,000, all of which were paid in cash.
(6) Fred’s tax rate is 40%. (Taxes will be paid in a subsequent period.)
a. What will the business report as net income for its first month of business?
b. List the flows of cash in and out of the business during the month. Show inflows as positives and outflows as negatives (using parentheses). Sum to arrive at a “Net Cash Flow” figure.
c. Should Fred pay more attention to net income or cash flow? Why?