Chapter 1, Problem 6PA

The financial statements at the end of Wolverine Realty’s first month of operations are as follows:

Instructions

By analyzing the interrelationships among the four financial statements, determine the proper amounts for (a) through (p).

To determine

Calculate the missing amount in the given financial statement of Company WR.

Explanation of Solution

Financial statements: Financial statements refer to those statements, which are prepared by the Company according to particular formats in accounting to show its financial position.

Financial statements include the following statements:

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Statement of owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ equity.

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

The financial statement of Company WR for month ended April 30, 2019, is given below.

Company WR
Income Statement
For the month ended April 30 , 2019
Particulars	Amount ($)	Amount ($)
Revenues
Fees earned		(a)  $750,000
Expenses
Wages expense	$300,000
Rent expense	$100,000
Supplies expense	(b)   $30,000
Utilities expense	$20,000
Miscellaneous expense	$25,000
Total expenses		$475,000
Net income		$275,000

Table (1)

Hence the net income of Company WR for month ended April 30, 2019, is $275,000.

Company WR
Statement of Owner's Equity
For the month ended April 30 , 2019
Particulars	Amount ($)	Amount ($)
DR Capital, April 1, 2019		(c)   $0
Investment on April 1,2019	$375,000
Net income for the month	(d)   $275,000
Deduct - Withdrawals	$125,000
Increase in Owner's equity		(e)   $525,000
DR Capital, April 30 , 2019		(f)   $525,000

Table (2)

Hence the DR Capital of Company WR for month ended April 30, 2019, is $525,000.

Company WR
Balance Sheet
April 30 , 2019
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$462,500
Supplies	$12,500
Land	$150,000
Total current assets		(g)   $625,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$100,000
Owner's equity
DR Capital	(h)   $525,000
Total liabilities and stockholders’ equity		(i)   $625,000

Table (3)

Hence the financial statement of Company WR shows the same asset and total liabilities and stockholder's equity balance of $625,000 for month ended April 30, 2019.

Company WR
Statement of Cash Flows
For the month ended April 30 , 2019
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers		(j)    $750,000
Cash payments for expenses and creditors	$387,500
Net cash flow used for operating activities		(k)  $362,500
Cash flows from investing activities:
Cash payment for acquisition of land		(l)  $150,000
Cash flows from financing activities:
Cash receipt of owner’s investment	(m)  $375,000
Cash Withdrawals	(n)  $125,000
Net cash flow from financing activities		(o)  $250,000
Net Increase in cash, April 30,2019 cash balance		(p)  $462,500

Table (4)

Hence the cash balance of Company WR on April 30, 2019, is $462,500.

Working Notes:

1. a) Fees Earned: Fees earned during the month of April is $750,000.

   Calculate the fees earned.

   $\begin{array}{c}\text{Net Income = Revenue }-\text{ Expense}\\ \text{Revenue = Net Income + Expense}\\ \text{= \$475,000 + \$275,000}\\ \text{= \$750,000}\end{array}$

2. b) Supplies expense: Supplies expense during the month of April is $30,000.

Calculate the supplies expense.

$\begin{array}{c}\text{Expenses = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Wage}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Rent}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Supplies}\\ \text{Expense}\end{array}\right)+\\ \left(\begin{array}{l}\text{Utilites}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Miscellaneous}\\ \text{Expense}\end{array}\right)\end{array}\right]\\ \$475,000=\$300,000+\$100,000\text{+}\left(\begin{array}{l}\text{Supplies}\\ \text{Expense}\end{array}\right)+\$20,000+\$25,000\\ \$475,000=\$445,000\text{+}\left(\text{Supplies Expense}\right)\\ \text{Supplies Expense}=\$475,000-\$445,000\\ =\$30,000\\ \end{array}$

1. c) DR Capital, April 1, 2019:  As this is the first month of operation for Company WR, there will be having no opening balance for the Capital account.
2. d) Net income for April:  Net income provided in the income statement is transferred to the statement of owner's equity.
3. e) Increase in Owner's equity: Increase in owner's equity is $525,000.

   Calculate the increase on owner's equity of Company WR.

   $\begin{array}{c}\begin{array}{l}\text{Increase in}\\ \text{Owner's Equity}\end{array}\}\text{ = }\left[\left(\text{Investment}\right)\text{+}\left(\text{Net Income}\right)-\left(\text{Withdrawals}\right)\right]\\ =\$375,000+\$275,000-\$125,000\\ =\$650,000-\$125,000\\ =\$525,000\end{array}$

4. f) DR Capital, April 30, 2019: The DR Capital on April 30, 2019 is the same as increase of Owner's equity as there was no opening balance. The DR Capital on April 30, 2019 is $525,000
5. g) Total Assets: The sum of total assets is $625,000.

   Calculate the total assets.

   $\begin{array}{c}\text{Total assets = Cash +Supplies + Land}\\ \text{= \$462,500+ }\$12,500+\$150,000\\ =\$625,000\end{array}$

6. h) DR Capital, April 30, 2019: The DR Capital on April 30, 2019 is the same as increase of Owner's equity as there was no opening balance. The DR Capital on April 30, 2019 is $525,000
7. i) Total liabilities and stockholders’ equity: The total liabilities and stockholder's equity is $625,000.

   Calculate the total liabilities and owner's equity.

   $\begin{array}{c}\begin{array}{l}\text{Total liabilities and}\\ \text{stockholder's equity}\end{array}\}\text{ = Total Liabilities +}\text{}\text{Total stockholder equity}\\ \text{= }\$100,000\text{ + \$525,000}\\ =\$625,000\end{array}$

8. j) Cash receipts from customers: This includes all the income generated and received in the form of cash in the month of April, is $750,000 and it is transferred from income statement.
9. k) Net cash flow used for operating activities: The cash flow used for operating activities in the month of April, is $362,500.

Calculate the cash flow used for operating activities.

$\begin{array}{c}\begin{array}{l}\text{Cash flow used for}\\ \text{operating activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash receipts}\\ \text{from customers}\end{array}\right)-\left(\begin{array}{l}\text{Cash payments for}\\ \text{expenses and creditors}\end{array}\right)\right]\\ \text{= \$750,000 }-\text{ \$387,500}\\ \text{= \$362,500}\end{array}$

1. l) Cash payment for acquisition of land: The land was purchased for $150,000, and this amount is transferred from the balance sheet.
2. m) Cash receipt of owner’s investment: This refers to the investment made by the owner on April 1, 2019, $375,000, and this amount is transferred from the statement of owner's equity.
3. n) Cash Withdrawals:  This refers to the amount withdrawn by the owner in April, $125,000, and this amount is transferred from the statement of owner's equity.
4. o) Net cash flow from financing activities; the cash flow from financing activities in the month of April, is $250,000.

Calculate the net cash flow from financing activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flow from}\\ \text{financing activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash receipt of}\\ \text{owner investment}\end{array}\right)-\left(\text{Cash Withdrawals}\right)\right]\\ \text{= \$375,000 }-\text{ \$125,000}\\ \text{= \$250,000}\end{array}$

1. p) Net Increase in cash, April 30, 2019 cash balance is $462,500 and it is transferred from balance sheet.