Chapter 2, Problem 42AP

To determine

Find the missing amounts in the given financial statements.

Answer to Problem 42AP

Find the missing amounts in the given financial statements.

	Year 1	Year 2	Year 3
Income Statements
Revenue	$700	$1,300	$2,000
Expense	(a) (500)	(700)	(1,300)
Net Income (Loss)	$200	(m) $600	$700
Statements of Changes in Stockholders’ Equity
Beginning Common Stock	$0	(n) $5,000	$6,000
Plus: Common Stock Issued	5,000	1,000	2,000
Ending Common Stock	5,000	6,000	(t) 8,000
Beginning Retained Earnings	0	100	200
Plus: Net Income (Loss)	(b) 200	(o) 600	700
Less: Dividends	(c) (100)	(500)	(300)
Ending Retained Earnings	100	(p) 200	600
Total Stockholders’ Equity	(d) $5,100	$6,200	$8,600
Balance Sheets
Assets
Cash	(e) $8,100	(q) $3,200	(u)$2,600
Land	0	(r) 8,000	8,000
Total Assets	(f) $8,100	$11,200	$10,600
Liabilities	(g) $3,000	$5,000	$2,000
Stockholders’ Equity
Common Stock	(h) 5,000	(s) 6,000	8,000
Retained Earnings	(i) 100	200	600
Total Stockholders’ Equity	(j) 5,100	6,200	8,600
Total Liabilities and Stockholders’ Equity	$8,100	$11,200	$10,600
Statements of Cash Flows
Cash Flows From Operating Activities:
Cash Receipts from Customers	(k)$700	$1,300	(v) $2,000
Cash Payments for Expenses	(l) (500)	(700)	(w) (1,300)
Net Cash Flows from Operating Activities	200	600	700
Cash Flows From Investing Activities:
Cash Payments for Land	0	(8,000)	0
Cash Flows From Financial Activities:
Cash Receipts from Loan	3,000	3,000	(0)
Cash Payments to Reduce Debt	0	(1,000)	(x) (3,000)
Cash Receipts from Stock Issue	5,000	1,000	(y) 2,000
Cash Payments for Dividends	(100)	(500)	(z) (300)
Net Cash Flows from Financial Activities	7,900	2,500	(1,300)
Net Change in Cash	8,100	(4,900)	(600)
Plus: Beginning Cash Balance	0	8,100	3,200
Ending Cash Balance	$8,100	$3,200	$2,600

Table (1)

Explanation of Solution

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. 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.

Income statement:  it is one of the financial statements, which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period.

Statement of stockholder's equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Statement of cash flows: it is one of the financial statements which reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Compute the missing amounts:

1. a) Compute the expense amount.

   $\begin{array}{c}\text{ Expense =}\text{Revenue-}\text{Net Income}\\ =\$700-\$200\\ =\$500\end{array}$

   Therefore, expense amount for Year 1 is $500.

2. b) Compute net income for Year 1.

   Net income for Year 1 is $200 (refer income statement).

3. c) Compute the dividends for Year 1.

   $\begin{array}{c}\text{Dividends =}\text{Net Income}-\text{Ending Retained Earnings}\\ \text{=}\text{\$200}-\text{\$100}\\ \text{=}\$100\end{array}$

   Therefore, dividend amount for Year 1 is $100.

4. d) Compute the total stockholders’ equity.

   $\begin{array}{c}\text{Total Stockholders’ Equity = Ending Common Stock}\text{+ Ending Retained Earnings}\\ \text{=}\text{\$5,000}\text{+}\text{\$100}\\ \text{=}\text{\$5,100}\end{array}$

   Therefore, the total stockholders’ equity for Year 1 is $5,100.

5. e) Compute the cash balance for Year 1.

   Cash balance for the Year 1 is $8,100 (as given in the cash flow statement).

6. f) Compute the total assets amount.

   $\begin{array}{c}\text{Total assets}\text{= Cash + Land}\\ \text{=}\text{\$8,100}\text{+}\text{\$0}\\ \text{=}\text{\$8,100}\end{array}$

   Therefore, total assets amount as on Year 1 balance sheet is $8,100.

7. g) Compute the liabilities amount as on Year 1 balance sheet.

   $\begin{array}{c}\text{Liabilities =}\text{Assets}-\text{Stockholders'}\text{Equity}\\ \text{=}\text{\$8,100}-\text{\$5,100}\\ \text{=}\text{\$3,000}\end{array}$

   Therefore, liabilities amount as on Year 1 balance sheet is $3,000.

8. h) Compute the common stock amount as on Year 1 balance sheet.

   Common stock issued during Year 1 is $5,000 (refer statement of changes in stockholders’ equity) and there is no beginning balance of common stock. Therefore $5,000 is the common stock amount as on Year 1 balance sheet.

9. i) Compute the retained earnings as on Year 1 balance sheet.

   $100 is reported as ending balance of retained earnings in the statement of changes in stockholders equity. Thus, $100 is the retained earnings as on Year 1 balance sheet.

10. j) Compute the total stockholders’ equity as on Year 1 balance sheet.

    $\begin{array}{c}\text{Total Stockholders’ Equity = Ending Common Stock}\text{+ Ending Retained Earnings}\\ \text{=}\text{\$5,000}\text{+}\text{\$100}\\ \text{=}\text{\$5,100}\end{array}$

    Therefore, the total stockholders’ equity as on Year 1 balance sheet is $5,100.

11. k) Compute the cash receipts from customers.

    In the income statement, revenues are $700. As mentioned all transactions are the cash transactions. Thus, the revenues are considered as the cash receipts from the customers.

    Therefore, cash receipts from the customers are $700.

12. l) Compute the cash payments for expenses.

    In the income statement, expenses are $700 [refer (a)]. As mentioned, all transactions are the cash transactions. Thus, the expenses are reported as cash payments for expenses.

    Therefore, cash payments for expenses are $700.

13. m) Compute the net income for Year 2.

    $\begin{array}{c}\text{ Net Income =}\text{Revenue}-\text{Expense}\\ =\$1,300-\$700\\ =\$600\end{array}$

    Therefore, net income for Year 2 is $600.

14. n) Compute the beginning common stock for Year 2

    Ending common stock of Year 1 is the beginning common stock of the Year 2. Thus, the beginning common stock of Year 2 is $5,000.

15. o) Compute the net income for Year 2.

    $\begin{array}{c}\text{ Net Income =}\text{Revenue}-\text{Expense}\\ =\$1,300-\$700\\ =\$600\end{array}$

    Therefore, net income for Year 2 is $600.

16. p) Compute the ending retained earnings of Year 2.

    Year 1’s ending retained earnings $100 is the beginning retained earnings of Year 2.

    $\begin{array}{c}\text{Ending Retained Earnings =}\text{Beginning}\text{Retained Earnings}+\text{Net Income}-\text{Dividends}\\ \text{=}\$100+\text{\$600}-\text{\$500}\\ \text{=}\$200\end{array}$

    Therefore, dividend amount for Year 1 is $100.

17. q) Compute the cash balance as on Year 2 balance sheet.

    Cash balance for the Year 2 is $3,200 (as given in the cash flow statement of Year 2).

18. r) Compute the land balance as on Year 2 balance sheet.

    Purchased land during Year 2 for $8,000 (refer investing activities of statement of cash flows of Year 2). Thus, the land balance as on Year 2 balance sheet is $8,000.

19. s) Compute the common stock as on Year 2 balance sheet.

    Ending balance of common stock in the statement of changes in stockholders equity is $6,000.  It is reported as a common stock as on balance sheet of Year 2

20. t) Compute the Ending common stock of Year 3’s statement of changes in the stockholders’ equity.

    Common stock as on balance sheet of Year 3 is $8,000. It is reported as ending balance of common stock in the statement of changes in stockholders equity.

21. u) Compute the cash balance as on Year 3 balance sheet.

    Cash balance for the Year 3 is $2,600 (as given [ending cash balance] in the cash flow statement of Year 3).

22. v) Compute the cash receipts from customers.

    In the income statement, revenues are $2,000. As mentioned all transactions are the cash transactions. Thus, the revenues are the cash receipts from the customers.

    Therefore, cash receipts from the customers are $2,000.

23. w) Compute the cash payments for expenses.

    In the income statement, expenses are $1,300. As mentioned, all transactions are the cash transactions. Thus, the expenses are reported as cash payments for expenses.

    Therefore, cash payments for expenses are $1,300.

24. x) Compute the cash payment to reduce debt in Year 3.

    $\begin{array}{c}\text{Cash payment to reduce debt = Liabilities in Year 2 – Liabilities in Year 3}\\ \text{=}\text{\$5,000}\text{-}\text{\$2,000}\\ =\$3,000\end{array}$

    Therefore, $3,000 is the cash payment to reduce debt in year 3.

25. y) Compute the cash receipt from issue of common stock.

    During the Year 3, $2,000 additional common stock issued for cash (refer statements of changes in the shareholders’ equity of Year 3).

    Therefore, cash receipt from issue of common stock is $2,000.

26. z) Compute the cash payment for dividends.

    During the Year 3, $300 divided paid for cash (refer statements of changes in the shareholders’ equity of Year 3).

    Therefore, cash payment for dividend is $300.