Cosmos Corporation was established on December 31, 2018, by a group of investors who invested a total of $1,000,000 for

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Cosmos Corporation was established on December 31, 2018, by a group of investors who
invested a total of $1,000,000 for shares of the new corporation's common stock. During the
month of January 2019, Cosmos provided services to customers for which the total revenue was
$100,000. Of this amount, $10,000 had not been collected by the end of January. Cosmos
recorded salary expense of $20,000, of which 90% had been paid by the end of the month; rent
expense of $5,000, which had been paid on January 1; and other expenses of $12,000, which had
been paid by check. On January 31, 2019, Cosmos purchased a van by paying cash of $30,000.
There were no other transactions that affected cash.

1. In which section of the statement of cash flows would the amount of cash paid for rent be
reported?
2. In which section of the statement of cash flows would the amount of cash paid for the van
purchase be reported?
3. By how much did Cosmos's cash increase or decrease during January 2019?
4. What was Cosmos's net income or net loss (after income tax expense) for the month of
January 2019? The income tax expense was $18,900.
5. Explain why the net increase or decrease in cash for a business generally will be different than
the net income, or net loss, for the same period.


Answer:
1. Cash used in operating activities.
2. Cash used in investing activities.
3. Amount collected from customers $90,000
Payment of salaries (18,000)
Payment of rent (5,000)
Payment of other expenses (12,000)
Payment for van (30,000)
Increase in cash $25,000
4. Revenues $100,000
Less expenses:
Salaries expense $20,000
Rent expense 5,000
Other expenses 12,000
Total expenses 37,000
Income before income taxes $63,000
Income tax expense 18,900
Net income $44,100
5.
Net income or net loss for a period is equal to revenues minus expenses; it is not
equal to the change in cash. Revenues are reported on the income statement when
earned (or when the goods or services are sold to the customer), which may be
before or after the period in which cash is received from the customer. Expenses
are reported on the income statement when incurred (or in the period they are
used to earn revenues). Again, the payment of cash may occur before or after the
period when an expense appears on the income statement.
Difficulty: 3 Hard
Topic: Distinguish different financial statements
Learning Objective: 01-01 Recognize the information conveyed in each of the four basic
financial statements and the way that it is used by different decision makers (investors, creditors,
and managers).