
Concept explainers
The assets, liabilities and equity relation, are known as the accounting equation. Assets are the resources of company and that increase as business expand whereas liabilities are the burden on company that has to pay in future. Equity means the owner claim on assets. An accounting equation represent the assets of the company are equal to the liabilities and equity of the company.
In can be represented as follows,
Income Statement:
It includes the information of net income earn or net loss suffered by the company. The expenses deducting from revenue and the resultant is net income or loss to the company. This is informative report that helps the user of financial information to take decision.
Statement of
It is the part of financial statement of the company, that contained information related to retained earnings. Retained earnings are the amount that a company wants to keep aside for internal usage of the company. That will not pay in the form of dividends to the shareholders and kept by the company aside, to pay debts or further investment.
It is a part of the Financial Statement of a company, which shows the financial position of the company as from where the company receive the money (assets) and to whom the company has to pay. (liabilities and shareholders').While purchase a share in the company the investor will firstly see the balance sheet of the respective company than only decide whether he purchase the share or not.
Statement of
This statement records the inflows and outflows of cash and funds of the Company during the accounting period.
It has following three parts:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
1.
To identify: The effect of given transactions on the accounting equation.

Explanation of Solution
Table (1)
Hence, the cash balance is $42,780, office equipment is $1,890, accounts payable is $80, common stock is $40,000, dividend is $1,400, revenue is $11,100 and expenses is $5,110.
2.
To prepare: The income statement, statement of retained earnings and balance sheet.
2.

Explanation of Solution
Prepare income statement.
G. Company | ||
Income Statement | ||
For the month ended May 31,20XX | ||
Particulars | Amount($) | Amount($) |
Revenue: | ||
Service Revenue | 11,100 | |
Total Revenue | 11,100 | |
Expenses: | ||
Advertising Expenses | 80 | |
Cleaning Expenses | 750 | |
Rent Expenses | 2200 | |
Salary Expenses | 1,500 | |
Telephone Expenses | 300 | |
Utilities Expenses | 280 | |
Total Expense | 5,110 | |
Net income | 5,990 |
Table (2)
Hence, net income of .G Company as on May 31, 20XX is $5,990.
Prepare statement of retained earnings.
G. Company | ||
Retained Earnings Statement | ||
For the month ended May 31,20XX | ||
Particulars | Amount($) | |
Opening balance | 0 | |
Net income | 5,990 | |
Total | 5,990 | |
Dividends | (1,400) | |
Retained earnings | 4,590 |
Table (3)
Hence, the retained earnings of G Company as on May 31, 20XX are $4,590.
Prepare balance sheet.
G. Company | ||
Balance Sheet | ||
As on May 31, 20XX | ||
Particulars | Amount($) | |
Assets | ||
Cash | 42,780 | |
Equipment | 1,890 | |
Total assets | 44,670 | |
Liabilities and | ||
Liabilities | ||
Accounts payable | 80 | |
Stockholder’s equity | ||
Common stock | 40,000 | |
Retained earnings | 4,590 | |
Total stockholders’ equity | 44,590 | |
Total Liabilities and Stockholder’s equity | 44,670 |
Table (4)
Hence, the total of the balance sheet of the G Company as on May 31, 20XX is of $44,670.
3.
To prepare: The statement of cash flows of the M Company.
3.

Explanation of Solution
Prepare the cash flow statement.
G. Company | ||
Statement of Cash Flows | ||
Month Ended May 31, 20XX | ||
Particulars | Amount($) | Amount($) |
Cash flow from operating activities | ||
Receipts: | ||
Collections from customers | 11,100 | |
Payments: | ||
Cleaning Expenses | (750) | |
Rent Expenses | (2200) | |
Salary Expenses | (1,500) | |
Telephone Expenses | (300) | |
Utilities | (280) | (5,030) |
Net cash from operating activities | 6,070 | |
Cash flow from investing activities | ||
Purchase of equipment | (1,890) | |
Net cash from investing activities | (1,890) | |
Cash flow from financing activities | ||
Issued common stock | 40,000 | |
Less: Payment of cash dividends | (1,400) | |
Net cash from financing activities | 38,600 | |
Net increase in cash | 42,780 | |
Cash balance, May 1,20XX | 0 | |
Cash balance, May 31,20XX | 42,780 |
Table (5)
Hence, the cash balance of the G Company as on May 31, 20XX is $42,780.
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Chapter 1 Solutions
Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card
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