Chapter 1, Problem 1.10E

a.

Introduction:

Financial statements are a complete record of the financial transactions that takes place in a company at a particular point of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company. There are four basic financial statements as shown in the figure below:

Basic Financial Statements

Figure (1)

To determine

To Compute: Net income for the year ended December 31, 2017.

Answer to Problem 1.10E

Determine net income for the year 2017.

Introduction:

Income statement is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time.

Income statement is also known as operations statement, earnings statement, revenue statement, or profit and loss statement. The net income is the excess of revenue over expenses. Use the following formula to determine the net income / net loss:

$\text{Net income / }\left(\text{loss}\right)\text{ = Revenues – Expenses}$

Prepare the income statement of the company for the year ended December 31st , 2017 as below.

O Park Income Statement For the year ended December 31 st, 2017.
Particulars	Amount ($)	Amount ($)
Revenues	132,000
Service Revenue	25,000	157,000
Less: Expenses		126,000
Net income		31,000

Table (1)

Explanation of Solution

Income statement is used to determine the net income / net loss of the company. It is calculated by finding out the difference between the net revenues and expenses. Net income for the year ended December 31 st, 2017 is $31,000.

Conclusion

Thus, the net income for the year ended December 31st, 2017 is $31,000.

b.

i.

To determine

Introduction:

Retained earnings is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and pays its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.

Use the following formula to determine the retained earnings for the year ending December 31, 2017.

$\text{Beginning retained earnings }\pm \text{ Changes in retained earnings = Ending retained earnings }$

Prepare retained earnings statement for the year ending December 31, 2017.

Answer to Problem 1.10E

Prepare the retained earnings statement of O Park for the year ended December 31st, 2017 as below.

O Park Retained Earnings Statement For the year ended December 31 st, 2017.
Particulars	Amount ($)
Retained earnings, January 1	5,000
Add:  Net income (From requirement a)	31,000
	36,000
Less:  Dividends	9,000
Retained earnings, December 31	27,000

Table (2)

Explanation of Solution

Ending retained earnings is determined by adding the net income and deducting the dividends to beginning retained earnings. Thus, above table shows the determination of the retained earnings, December 31.

Conclusion

Thus, the ending retained earnings is $27,000.

ii.

To determine

Introduction:

Balance sheet is a financial statement that shows the available assets (owner’s equity and outsider’s equity) and owed liabilities from investing and financial activities of a company. This statement reveals the financial health of company. So, this statement is also called as Statement of Financial Position. It helps the users to know the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The main components of balance sheet are assets, liabilities, and stockholders’ equity.

Use the formula to prepare balance sheet.

$\text{Assets = Liabilities + Stockholders' equity}$

Prepare balance sheet for O Park as of December 31, 2017.

Answer to Problem 1.10E

Prepare the balance sheet for O Park as of December 31, 2017 as below.

O Park Balance Sheet December 31, 2017
Particulars	Amount ($)	Amount ($)
Assets
Cash		8,500
Supplies		5,500
Equipment		114,000
Total assets		128,000
Liabilities and Stockholders’ equity
Notes payable	50,000
Accounts payable	11,000
Total liabilities		61,000
Stockholders’ equity
Common stock	40,000
Retained earnings	27,000	67,000
Total liabilities and stockholders’ equity		128,000

Table (3)

Explanation of Solution

Balance sheet includes the items of assets, liabilities, and stockholders’ equity. The total assets of the company are the sum of cash, supplies, and equipment. The total liabilities are the sum of notes payable and accounts payable. The stockholders’ equity is the sum of common stock and retained earnings.

Conclusion

Thus, assets are equal to liabilities and stockholders’ equity.

c.

To determine

To Comment: On the company’s growth.

Explanation of Solution

The income statement is prepared to determine the net income. The revenues from the G store are only 16% out of total revenues.  In order to know whether the company is in more trouble than worth, it is necessary to know the expenses that are attributable to the G store.

In this income statement, expenses amount is shown in the single category instead of showing it separately for both the companies. Thus, when there is a breakdown of categories, it helps the company to generate profit or loss for the company.

Conclusion

Thus, there should be breakdown of the categories with respect to two companies.