Required information Use the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $83,110 in assets in exchange for its common stock to launch the business. On December 31, the company's records show the following items and amounts. Cash $ 1,120 12,940 2,640 Accounts receivable office supplies office equipment Land Accounts payable Common stock $ 14,550 Cash dividends 12,940 Consulting revenue 2,400 Rent expense 17,020 Salaries expense. 45,860 Telephone expense 7,820 Miscellaneous expenses 83, 110 5,920 800 620 Exercise 1-19 (Algo) Preparing a statement of retained earnings LO P2 Using the above information prepare a December statement of retained earnings for Ernst Consulting. Hint: Retained Earnings on December 1 was $0.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![### Educational Exercise: Preparing a Statement of Retained Earnings
#### Required Information
**Use the following information for the Exercises below:**
[The following information applies to the questions displayed below.]
On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $83,110 in assets in exchange for its common stock to launch the business. On December 31, the company's records show the following items and amounts:
- **Assets:**
- Cash: $14,550
- Accounts receivable: $12,940
- Office supplies: $2,400
- Office equipment: $17,020
- Land: $45,860
- **Liabilities:**
- Accounts payable: $11,870
- Rent expense: $1,640
- Salaries expense: $5,920
- Telephone expense: $620
- Miscellaneous expenses: $950
- **Equity:**
- Cash dividends: $1,120
- Consulting revenue: $12,940
- Common stock: $83,110
#### Exercise 1-19 (Algo) Preparing a statement of retained earnings LO P2
**Task:**
Using the above information, prepare a December statement of retained earnings for Ernst Consulting. Hint: Retained Earnings on December 1 was $0.
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### Ernst Consulting
**December Statement of Retained Earnings**
1. **Retained Earnings, December 1:** $0
2. **Add: Net Income**
- Revenues: $12,940
- Expenses:
- Rent Expense: $1,640
- Salaries Expense: $5,920
- Telephone Expense: $620
- Miscellaneous Expenses: $950
- Total Expenses: $9,130
- Net Income: $12,940 - $9,130 = $3,810
3. **Less: Dividends**
- Cash Dividends: $1,120
4. **Retained Earnings, December 31**
- Beginning Retained Earnings: $0
- Add: Net Income: $3,810
- Less: Cash Dividends: $1,120
- Ending Retained Earnings: $3,810 - $1,120 = $2,690
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