Problem: Fred Gowen opened Gowen Retail Sales as a sole proprietorship and recorded the following transactions during his first month in business:
(1) Purchased $50000 of fixed assets, putting 10% down and borrowing the remainder.
(2) Sold 1000 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 sold of $21000 related to the above sales.
(4) Purchased $30000 worth of inventory and paid cash.
(5) Incurred other expenses( including the interest from the loan) of $5000, all of which were paid in cash.
(6) Fred's tax rate is 40%. (Taxes will be paid in a subsequent period.)
Task to do:
Question 1: What will the business report as net income for its first month of business?
Question 2: 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.
Question 3: Should Fred pay more attention to net income or cash flow? Why?