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explain the difference between net income and the amount of cash flow from operating 650376

Effect of warranties on income and cash flow

To support herself while attending school, Kim Lee sold stereo systems to other students. During her first year of operation, she sold systems that had cost her $95,000 cash for $140,000 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 6 percent of sales. During the year she paid $200 cash to replace a defective tuner.

Required

a. Prepare an income statement and statement of cash flows for Lee’s first year of operation.

b. Explain the difference between net income and the amount of cash flow from operating activities.

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