Chapter 1, Problem 7BP

1.

To determine

Arrange the asset, liability and equity titles in a table.

Explanation of Solution

Figure (1)

2.

To determine

Show the effects of the transactions on the accounts of the accounting equation.

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a business and claims on the resources by the creditors, and the owners.

The effects of each transaction on the accounts of accounting equation are given bellow:

Figure (2)

3.

To determine

Prepare the income statement, the statement of retained earnings, the balance sheet and statement of cash flows for the month of May.

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.

Statement of retained earnings: Statement of retained earnings is an equity statement which shows the changes in the stockholders’ equity over a period of time.

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ 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. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities. Operating activities include cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

Prepare income statement:

Company N
Income Statement
For Month Ended June 30
Particulars	Amount ($)	Amount ($)
Revenues
Consulting services revenue		16,925
Expenses
Rent expense	6,000
Salaries expense	1,600
Advertising expense	1,150
Utilities expense	890
Telephone expense	150
Total expenses		9,790
Net income		7,135

Table (1)

Prepare statement of retained earnings:

Company N
Statement of Retained Earnings
For Month Ended June 30
Particulars	Amount ($)
Retained earnings,  1	0
Add:
Net income	7,135
Less:
Dividends	4,000
Retained earnings, June 30	3,135

Table (2)

Prepare balance sheet:

Company N
Balance Sheet
For the month ended June 30
Assets	Amount ($)	Liabilities	Amount ($)
Cash	130,060	Accounts payable	0
Office equipment	675	Equity
		Common stock	130,000
		Retained earnings	3,135
		Total equity	133,135
Total assets	$133,135	Total liabilities and equity	133,135

Table (3)

Prepare statement of cash flows:

Company N
Statement of Cash Flows
For Month Ended June 30
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Cash received from customers (1)	16,250
Cash paid for rent	(6,000)
Cash paid for advertising	(1,150)
Cash paid for telephone	(150)
Cash paid for utilities	(890)
Cash paid to employees	(1,600)
Net cash provided by operating activities		6,460
Cash flows from investing activities
Cash paid for equipment	(2,400)
Net cash used by investing activities		(2,400)
Cash flows from financing activities
Cash investments from stockholder	130,000
Cash dividends to stockholder	(4,000)
Net cash provided by financing activities		126,000
Net increase in cash		130,060
Cash balance, June 1		0
Cash balance, June 30		130,060

Table (4)

Working note:

Calculate the cash received from customers:

$\begin{array}{c}\text{Cash}\text{received}\text{from}\text{customers}\text{=}\left(\begin{array}{l}\text{Cash}\text{collected}\text{from maintenance}\text{work}\text{+}\\ \text{Cash}\text{collected}\text{for}\text{services}\text{+}\\ \text{Credit}\text{collected}\text{from}\text{maintenancework+}\end{array}\right)\\ \text{=\$850+\$7,500+7,900}\\ \text{=\$16,250}\end{array}$ (1)