Chapter 1, Problem 1.3AP

(a)

To determine

Income statement

This 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.

Retained earnings statement

This 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.

Balance sheet

This is a financial statement that shows the available assets and claims to assets of a company at a particular point of time. Both the amount of assets and claims to assets remains always equal. Claims to assets are segregated into two categories, one is claims of creditors (liabilities) and the other is claims of stockholders (Stockholders’ equity).

This statement helps users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities. The primary constituents of balance sheet are the assets, the liabilities and the stockholders’ equities, which are depicted in accounting equation in the form of the mathematical equation.

To prepare: An income statement and a retained earnings statement for Company HS for the month of June and balance sheet at June 30, 2014.

(b)

To determine

To discuss: whether Company HS’s first month of operations was a success.

(c)

To determine

To discuss: Company HS’s decision to distribute a dividend.