Chapter 1, Problem 9BP

1.

To determine

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

Explanation of Solution

The arrangement of asset, liability and equity titles in a table is as follows:

Figure (1)

2.

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 (2)

3.

To determine

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

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 R
Income Statement
For Month Ended December 31
Particulars	Amount ($)	Amount ($)
Revenues
Roofing fees earned		20,800
Expenses
Rent expense	700
Salaries expense	1,560
Utilities expense	295
Total expenses		2,555
Net income		18,245

Table (1)

Prepare statement of retained earnings:

Company R
Statement of Retained Earnings
For Month Ended December 31
Particulars	Amount ($)
Retained earnings, December 1	0
Add:
Net income	18,245
Less:
Dividends	1,800
Retained earnings, December 31	16,445

Table (2)

Prepare balance sheet:

Company R
Balance Sheet
For the year ended  December 31,2017
Assets	Amount ($)	Liabilities	Amount ($)
Cash	87,545	Accounts payable	7,100
Accounts receivable	5,000	Equity
Office supplies	3,700	Common stock	80,000
Office equipment	2,300	Retained earnings	16,445
Roofing equipment	5,000	Total equity	96,445
Total assets	103,545	Total liabilities and equity	103,545

Table (3)

Prepare statement of cash flows:

Company R
Statement of Cash Flows
For Month Ended July 31
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Cash received from customers (1)	15,800
Cash paid for rent	(700)
Cash paid for supplies	(600)
Cash paid for utilities	(295)
Cash paid to employees	(1,560)
Net cash provided by operating activities		12,645
Cash flows from investing activities
Cash paid for roofing equipment	(1,000)
Cash paid for office equipment	(2,300)
Net cash used by investing activities		(3,300)
Cash flows from financing activities
Cash investment from shareholder	80,000
Cash dividend to shareholder	(1,800)
Net cash provided by financing activities		78,200
Net increase in cash		87,545
Cash balance, July 1		0
		87,545

Table (4)

Working note:

Calculate the cash received from customers:

$\begin{array}{c}\text{Cash}\text{received}\text{from}\text{customers}\text{=}\left(\begin{array}{l}\text{Cash}\text{collected}\text{from}\text{work}\text{+}\\ \text{Credit}\text{collected}\text{from}\text{work}\end{array}\right)\\ \text{=\$7,600+\$8,200}\\ \text{=\$15,800}\end{array}$ (1)

4.

To determine

Explain the effect of change on total assets, total liabilities and total equity.

Explanation of Solution

If the purchase of roofing equipment on July 3 for $5,000 is acquired through an additional investment of cash by owner, then following is the effect of this change:

(a) Total assets will be greater by $1,000.

(b) Total liabilities will be lesser by $4,000.

(c) Total equity will be $5,000 greater.