Chapter 2, Problem 7AE

To determine

Prepare the accounting equation to record the events.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below.

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

Record the effect of the event in the accounting equation.

Table (1)

a.

To determine

Identify the amount of revenue that is reported on the Year 1 income statement.

Explanation of Solution

Income statement:

This is a financial statement that shows the net income earned or net loss suffered by Incorporation through reporting all the revenues earned and expenses incurred by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement.

• The amount of revenue recognized is $72,000 (Amount earned by providing services to the customers) is reported on the Year 1 income statement.

b.

To determine

Identify the amount of cash flow from revenue will be reported on the statement of cash flows.

Explanation of Solution

Cash Flow Statement:

Cash Flow Statement is a fundamental financial statement that renders valuable information regarding the cash inflows or the cash receipts of a business and the cash outflows or cash payments for a specific period of time.

• The amount of cash flows from revenue that is reported on the statement of cash flows is $55,000 (Amount collected from accounts receivable).

c.

To determine

Calculate the amount of net income for the period.

Explanation of Solution

Net income:

Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Prepare the income statement to calculate the amount of net income.

Incorporation L
Income statement
Particulars	Amount ($)	Amount ($)
Revenue	$72,000
Less: Expenses
Operating expenses	$42,000
Net income		$30,000

Table (2)

The amount of net income for the period is $30,000.

d.

To determine

Identify the amount of cash flow from operating activities for the period.

Explanation of Solution

Cash Flow Statement:

Cash Flow Statement is a fundamental financial statement that renders valuable information regarding the cash inflows or the cash receipts of a business and the cash outflows or cash payments for a specific period of time.

Cash flows from operating activities refer to the cash received or cash paid in day-to-day operating activities of a company.

Prepare the statement of cash flow to calculate the cash flow from operating activities.

Incorporation L
Cash flow statement
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities
Cash from revenue	$55,000
Cash paid for expenses	$34,000
Net cash flow from operating activities		$21,000

Table (3)

The net cash flow from operating activities for the period is $21,000.

e.

To determine

Explain the reason for difference in the net income from cash flow from operating activities.

Explanation of Solution

There is a difference of $17,000 between the net income and the actual amount collected from revenue, as the income earned is $72,000 but the actual revenue that is collected during the period is $55,000. There is a difference of $8,000 between the net income and the actual amount cash paid for expense, because the expenses incurred during the period is $42,000 but only $34,000 is the payment made for the expenses. So, there is a difference in the net income and it is higher than the cash flow from operating activities.

f.

To determine

Identify the amount of net cash flow from investing activities.

Explanation of Solution

Investing activities:

Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others. Investing cash flows causes changes in non-current assets.

• The amount of cash outflow from investing activities is $18,000 (Purchase of land).

g.

To determine

Identify the amount of net cash flow from financing activities.

Explanation of Solution

Financing activities:

Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others. Financing cash flows have an impact on non-current liabilities and stockholders’ equity.

• The amount of cash inflow from financing activities is $44,000 (Issue of common stock).

h.

To determine

Identify the amount of total assets, total liabilities, and total stockholders’ equity will be reported on the year-end balance sheet.

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. The resources of the company are assets which include money contributed by stockholders and creditors.

Prepare the balance sheet to identify the amount of total assets, total liabilities, and total stockholders’ equity.

Incorporation L
Balance sheet
Particulars	Amount ($)	Amount ($)
Assets
Cash	$47,000
Accounts receivable	$17,000
Land	$18,000
Total assets		$82,000
Liabilities
Accounts payable	$8,000
Total liabilities		$8,000
Stockholders' equity
Retained earnings	$30,000
Common stock	$44,000
Total stockholders' equity		$74,000
Total liabilities and stockholders' equity		$82,000

Table (4)