Chapter 1, Problem 22E

As of January 1, 2018, Room Designs, Inc. had a balance of $9,900 in Cash, $3,500 in Common Stock, and $6,400 in Retained Earnings. These were the only accounts with balances in the ledger on January 1, 2018. Further analysis of the company’s cash account indicated that during the 2018 accounting period, the company had (1) net cash inflow from operating activities of $9,800, (2) net cash outflow for investing activities of $16,500, and (3) net cash inflow from financing activities of $11,000. All revenue and expense events were cash events. The following accounts and balances represent the general ledger of Room Designs, Inc. as of December 31, 2018, before closing.

Required

1. a. Assume that the net cash inflow from financing activities of $11,000 was caused by three events. Based on the information given, identify these events and determine the cash flow associated with each event.
2. b. What did the company purchase that resulted in the cash outflow from investing activities?
3. c. Prepare an income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows.

To determine

 Identify the events and the cash flow associated with each event.

Explanation of Solution

Accounting event: An accounting event is a cost-effective event that affects assets, liabilities, or stockholders’ equity of a Company.

Financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others.

The Events and cash flow associated with each event are identified as follows:

• The cash balance in notes payable account increased to $9,000 from zero. Therefore Incorporation R received cash inflow of $9,000 through issuance of note payable.
• The balance in the account of common stock increased to $7,500 from $3,500. Therefore, Incorporation R must have received cash inflow of $4,000 $\left(\text{\$7,500}-\text{\$4,500}\right)$  through issuance of common stock.
• Dividend payment of $2,000 might have caused a net cash outflow.

Compute the net cash inflow from financing activities:

Particulars	Amount ($)
Cash Flows From Financing Activities:
Cash Receipts from Loan	9,000
Cash Receipts from Stock Issue	4,000
Cash Payments for Dividends	(2,000)
Net Cash Flow from Financing Activities	11,000

Table (1)

To determine

Ascertain the purchase of the Company that resulted in the cash outflow from investing activities.

Explanation of Solution

Investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.

The purchase of the Company that resulted in the cash outflow from investing activity is as follows:

The land account increased to $16,500 from zero. Therefore it is noted that the Incorporation R should have purchased land for $16,500 that resulted in the net cash outflow of $16,500.

To determine

Prepare an income statement, statement of changes in stockholder’s equity, balance sheet and statement of cash flows.

Explanation of Solution

Income statement: Income statement is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Prepare an income statement for the year ending December 31, 2018:

Incorporation R
Income Statement
For the year Ended December 31, 2018
Particulars	Amount ($)
Revenues	18,100
Expenses	(8,300)
Net Income	9,800

Table (2)

Prepare the Statement of changes in stockholders’ equity for the year ending December 31, 2018:

Incorporation R
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	3,500
Add: Common Stock Issued	4,000
Ending Common Stock		7,500
Beginning Retained Earnings	6,400
Add: Net Income	9,800
Less: Dividends	(2,000)
Ending Retained Earnings		14,200
Total Stockholders’ Equity		21,700

Table (3)

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet as on December 31, 2018:

Incorporation R
Balance Sheet
As of December 31, 2018
Particulars	Amount ($)	Amount ($)
Assets:
Cash	14,200
Land	16,500
Total Assets		30,700
Liabilities:
Notes Payable	9,000
Total Liabilities		9,000
Stockholders’ Equity:
Common Stock	7,500
Retained Earnings	14,200
Total Stockholders’ Equity		21,700
Total Liabilities and Stockholders’ Equity		30,700

Table (4)

Statement of cash flows: Statement of cash flows is one among the financial statement of a Company statement that shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations.

Prepare the Statement of cash flows for the year ended December 31, 2018:

Incorporation C
Statement of Cash Flows
For the Year Ended December 31, 2018
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers	18,100
Cash Payments for Expenses	(8,300)
Net Cash Flow from Operating Activities		9,800
Cash Flows From Investing Activities:
Cash Paid to Purchase Land	(16,500)
Net Cash Flow from Investing Activities		(16,500)
Cash Flows From Financing Activities:
Cash Receipts from Loan	9,000
Cash Receipts from Stock Issue	4,000
Cash Payments for Dividends	(2,000)
Net Cash Flow from Financing Activities		11,000
Net Increase in Cash		4,300
Add: Beginning Cash Balance		9,900
Ending Cash Balance		14,200

Table (5)