Chapter 1, Problem 33P

a.

To determine

Prepare an income statement, statement of changes in stockholders’ equity, period-end balance sheet, and statement of cash flows for the year 2014.

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 income statement:

C Enterprises
Income Statement
For the Period Ended December 31, 2014
Revenue	46,000
Expenses	(26,000)
Net Income	20,000

Table (1)

Statement of changes in stockholders' equity:

Statement of changes in stockholders' equity records the changes in the owners’  equity during the end of an accounting period by explaining about the increase or  decrease in the capital reserves of shares.

Prepare statement of changes in stockholders’ equity:

C Enterprises
Statement of Changes in Stockholders’ Equity
For the Period Ended December 31, 2014
Particulars	Amount ($)	Amount ($)
Beginning Common Stock	25,000
Add: Common Stock Issued	15,000
Ending Common Stock		$ 40,000
Beginning Retained Earnings	35,000
Add: Net Income	20,000
Less: Dividends	(5,000)
Ending Retained Earnings		50,000
Total Stockholders’ Equity		$ 90,000

Table (2)

Note: To know the value of beginning retained earnings refer to Table (5).

Balance sheet:

Balance sheet summarizes the assets, the liabilities, and the stockholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare balance sheet:

C Enterprises
Balance Sheet
As of December 31, 2014
Particulars	Amount ($)	Amount ($)
Assets
Cash	$ 95,000
Total Assets		$ 95,000
Liabilities		$ 5,000
Stockholders’ Equity
Common Stock	$ 40,000
Retained Earnings	50,000
Total Stockholders’ Equity		90,000
Total Liabilities and Stockholders’ Equity		$ 95,000

Table (3)

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 statement of cash flows:

C Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2014
Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities:
Cash Receipts from Customers	46,000
Cash Payments for Expenses	(26,000)
Net Cash Flow from Operating Activities		20,000
Cash Flows From Investing Activities		0
Cash Flows From Financing Activities:
Cash Receipts from Stock Issue	15,000
Cash Payments to Creditors	(10,000)
Cash Dividend to Stockholders	(5,000)
Net Cash Flow from Financing Activities		0
Net Increase in Cash		20,000
Add: Beginning Cash Balance		75,000
Ending Cash Balance		95,000

Table (4)

Working note 1: Calculate the value of beginning retained earnings:

C Enterprises
Accounting Equation
		Assets	=	Liabilities	+	Stockholders’ Equity
		Cash	=	Liabilities	+	Common Stock	+	Retained Earnings
Beg. Balances		$ 75,000		$ 15,000		25,000		$ 35,000
Earned Revenue		$ 46,000						$ 46,000
Paid Expenses		($ 26,000)						($ 26,000)
Paid Dividends		($ 5,000)						($ 5,000)
Issued Stock		$ 15,000				15,000
Paid Liability		($ 10,000)		($ 10,000)
		$ 95,000	=	$ 5,000	+	40,000	+	$ 50,000

Table (5)

b.

To determine

Calculate the percentage of total assets provided by creditors, investors, and earnings.

Explanation of Solution

Debt to Asset Ratio:

Debt to asset ratio is the ratio that measures the difference between total asset and total liability of the company. Debt ratio reflects the finance strategy of the company. It is used to evaluate company’s ability to pay its debts. Higher debt ratio implies the higher financial risk.

Percentage of assets provided by creditors is calculated as follows:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{creditors'}\\ \text{loan}\text{on}\text{total}\text{assets}\end{array})\text{=}\frac{\text{Creditor's}\text{ loan}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$5,000}}{\text{\$95,000}}\text{×100}\\ \text{=5}\text{.26\%}\end{array}$

Stockholders’ equity to asset ratio:

Stockholders ‘equity to asset ratio is the ratio that measures the difference between total asset and stockholders ‘equity of the company. Stockholders’ equity ratio reflects the amount of assets that can be claimed by the stockholders in proportion to the value of shares owned by them.

Percentage of total assets provided by investors is calculated as follows:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{investors'}\\ \text{contribution}\text{on}\text{total}\text{assets}\end{array})\text{=}\frac{\text{Investor's}\text{contribution}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{\$40,000}}{\text{\$95,000}}\text{×100}\\ \text{=42}\text{.11\%}\end{array}$

Return on assets:

Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings with relative to its total assets.

Percentage of total assets provided by retained earnings is calculated as follows:

  $\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{total}\text{assets}\\ \text{from}\text{retained}\text{earnings}\end{array})\text{=}\frac{\text{Retained}\text{earnings}}{\text{Total}\text{assets}}\text{×100}\\ \text{=}\frac{\text{50,000}}{\text{\$95,000}}\text{×100}\\ \text{=52}\text{.63\%}\end{array}$

c.

To determine

Calculate the balance in the revenue, Expenses, and dividends accounts as of January 1, 2015.

Explanation of Solution

The balance in the revenue, expenses and dividends is zero as on January 1, 2015, since they were closed to Retained Earnings on December 31, 2014.