Chapter 1, Problem 7PSB

To determine

Accounting Equation:

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 follow,

  $$

  $\text{Assets}=\text{Liabilities}+\text{Equity}$

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 Retained Earnings:

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.

Balance Sheet:

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 Cash Flows:

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 $130,060,accounts receivables is$675 equipment is $2,400, common stock is $130,000, dividend is $4,000, revenue is $16,925 and expenses is $9,790.

2.

To determine

To prepare: The income statement, statement of retained earnings and balance sheet for the month of June 31,20XX.

Explanation of Solution

Prepare income statement.

N. Company
Income Statement
For the month ended June 30,20XX
Particulars	Amount($)	Amount($)
Revenue:
Service Revenue	16,925
Total Revenue		16,925
Expenses:
Advertising Expenses	1,150
Rent Expenses	6,000
Salary Expenses	1,600
Telephone Expenses	150
Utilities Expenses	890
Total Expense		9,790
Net income		7,135

     Table (2)

Hence, net income of .N Company as on June 30, 20XX is $7,135

Prepare statement of retained earnings

N. Company
Retained Earnings Statement
For the month ended June 30,20XX
Particulars	Amount($)
Opening balance	0
Net income	7,135
Total	7,135
Dividends	(4,000)
Retained earnings	3,135

     Table (3)

Hence, the retained earnings of N Company as on June 30, 20XX are $3,135.

Prepare balance sheet

N. Company
Balance sheet
As on June 30, 20XX
Particulars		Amount($)
Assets
Cash		130,060
Equipment		2,400
Accounts Receivables		675
Total Assets		133,135
Liabilities and Stockholder’s Equity
Liabilities
Stockholder’s Equity
Common Stock	130,000
Retained earnings	3,135
Total stockholders’ equity		133,135
Total Liabilities and Stockholder’s equity		133,135

     Table (4)

Hence, the total of the balance sheet of the N Company as on June 30, 20XX is of $133,135.

3.

To determine

To prepare: The statement of cash flows of the M Company.

Explanation of Solution

Prepare the cash flow statement:

N. Company
Statement of Cash Flows
Month Ended June 30, 20XX
Particulars	Amount($)	Amount($)
Cash flow from operating activities
Receipts:
Collections from customers		16,250
Payments:
…Advertising Expense	(1,150)
Rent Expenses	(6,000)
Salary Expenses	(1,600)
Telephone Expenses	(150)
Utilities Expense	(890)	(9,790)
Net cash from operating activities		6,460
Cash flow from investing activities
Purchase of equipment	(2,400)
Net cash from investing activities		(2,400)
Cash flow from financing activities
Issued common stock	130,000
Less: Payment of cash dividends	(4,000)
Net cash from financing activities		126,000
Net increase in cash		130,060
Cash balance, June 1,20XX		0
Cash balance, June 30,20XX		130,060

     Table (5)

Hence, the cash balance of the N Company as on June 30, 20XX is $130,060.