Chapter 1, Problem 9AP

1.

To determine

Create the table showing the effects of each transaction using 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 (1)

2.

To determine

Prepare the income statement, statement of retained earnings and balance sheet.

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.

Prepare income statement:

Company S
Income Statement
For Month Ended December 31
Particulars	Amount ($)	Amount ($)
Revenues
Electrical fees earned		7,100
Expenses
Rent expense	1,000
Salaries expense	1,400
Utilities expense	540
Total expenses		2,940
Net income		4,160

Table (1)

Prepare statement of retained earnings:

Company S
Statement of Retained Earnings
For Month Ended December 31
Particulars	Amount ($)
Retained earnings, December 1	0
Add:	4,160
Net income	4,160
Less:
Dividends	950
Retained earnings, December 31	3,210

Table (2)

Prepare balance sheet:

Company S
Balance Sheet
For the year ended  December 31,2017
Assets	Amount ($)	Liabilities	Amount ($)
Cash	59,180	Accounts payable	8,550
Accounts receivable	900	Equity
Office supplies	1,150	Common stock	65,000
Office equipment	2,530	Retained earnings	3,210
Electrical equipment	13,000	Total equity	68,210
Total assets	76,760	Total liabilities and equity	76,760

Table (3)

3.

To determine

Prepare statement of cash flows.

Explanation of Solution

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 statement of cash flows:

Company S
Statement of Cash Flows
For Month Ended December 31
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Cash received from customers (1)	6,200
Cash paid for rent	(1,000)
Cash paid for supplies	(800)
Cash paid for utilities	(540)
Cash paid to employees	(1,400)
Net cash provided by operating activities		2,460
Cash flows from investing activities
Cash paid for office equipment	(2,530)
Cash paid for electrical equipment	(4,800)
Net cash used by investing activities		(7,330)
Cash flows from financing activities
Cash investment from shareholder	65,000
Cash dividend to shareholder	(950)
Net cash provided by financing activities		64,050
Net increase in cash		59,180
Cash balance, December 1		0
Cash balance, December 31		59,180

Table (4)

Working note:

Calculate the cash received from customers:

$\begin{array}{c}\text{Cash}\text{received}\text{from}\text{customers}\text{=}\left(\begin{array}{l}\text{Cash}\text{collected}\text{from}\text{electrical}\text{work}\text{+}\\ \text{Credit}\text{collected}\text{from}\text{electrical}\text{work}\end{array}\right)\\ \text{=\$1,200+\$5,000}\\ \text{=\$6,200}\end{array}$ (1)

4.

To determine

 Compute the dollar effect of this change on the month-end amounts.

Explanation of Solution

If the investment of cash on December 1 is $49,000 instead of $65,000 and if the difference of $16,000 was borrowed from bank by the Company, then following is the effect of this change:

(a) Total assets remain the same.

(b) Total liabilities will be $16,000 greater.

(c) Total equity will be $16,000 lower (due to less investment of owner).