
Concept explainers
a.
Prepare a
a.

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. Hence, the main elements of the balance sheet are assets, liabilities, and
The balance sheet of Company S is prepared as follows:
Company S | |||
Balance Sheet | |||
For the Year Ended September 30, current year | |||
Assets | Amount ($) | Liabilities & Owners' Equity | Amount ($) |
Cash | 7,400 | Liabilities: | |
1,250 | Notes payable (1) | 70,000 | |
Supplies | 3,440 | Accounts payable | 8,500 |
Furniture and fixtures | 20,000 | Total liabilities | 78,500 |
Building | 45,500 | Owners' equity: | |
Land | 55,000 | Capital stock | 50,000 |
| 4,090 | ||
Total Assets | 132,590 | Total Liabilities and Owners' Equity | 132,590 |
Table (1)
Working note:
Calculate the amount of notes payable:
b.
Prepare a balance sheet at October 6, 2015; prepare income statement and a statement of
b.

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. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
Income statement: The financial statement 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 is referred to as income statement.
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
The balance sheet of Company S is prepared as follows:
Company S | |||
Balance Sheet | |||
For the Year Ended October 6, current year | |||
Assets | Amount ($) | Liabilities & Owners' Equity | Amount ($) |
Cash | 29,400 | Liabilities: | |
Accounts receivable | 1,250 | Notes payable | 70,000 |
Supplies (4) | 4,440 | Accounts payable ( refer to note) | 18,000 |
Furniture and fixtures (3) | 38,000 | Total liabilities | 88,000 |
Building | 45,500 | Owners' equity: | |
Land | 55,000 | Capital stock (2) | 80,000 |
Retained earnings (6) | 5,590 | ||
Total Assets | 173,590 | Total Liabilities & Owners' Equity | 173,590 |
Table (2)
Note: Accounts payable was paid in full on October 3 and the amount of accounts payable on October 6 was 18,000 since furniture was purchased on account for $18,000.
Calculate the value of capital stock on October 6:
Calculate the value of furniture on October 6:
Calculate the value of supplies on October 6:
Calculate the value of revenue on October 6:
Calculate the value of retained earnings on October 6:
The income statement of Company S is prepared as follows:
Company S | |
Income Statement | |
For the Period October 1-6, current year | |
Particulars | Amount ($) |
Revenues | 5,500 |
Expenses | (4,000) |
Net income | 1,500 |
Table (3)
Therefore, the income statement reported net income of $1,500
The statement of cash flows for Company S prepared as follows:
Company S | ||
Statement of Cash Flows | ||
For the Period October 1-6, current year | ||
Cash flows from operating activities: | Amount ($) | Amount ($) |
Cash received from revenues | 5,500 | |
Cash paid for expenses | (4,000) | |
Cash paid for accounts payable | (8,500) | |
Cash paid for supplies | (1,000) | |
Cash used in operating activities | (8,000) | |
Cash flows from investing activities: | ||
None | ||
Cash flows from financing activities: | ||
Cash received from sale of capital stock | 30,000 | |
Increase in cash | 22,000 | |
Cash balance, October 1, current year | 7,400 | |
Cash balance, October 6, current year | 29,400 |
Table (4)
Therefore, the statement of cash flows reported net increase in cash of $22,000.
c.
Find out whether the Company S is in a stronger financial position on September 30 or on October 6 and Explain briefly.
c.

Explanation of Solution
- On September 30, the liquid assets (cash and accounts receivable) amounted to $8,650 which exceeded the $8,500 liabilities (accounts payable) that are due in the near future.
- On October 6, the cash balance of Company exceeded its short-term obligations after additional investment of cash by stockholders.
- Company S is in a stronger financial position on October 6 than on September 30 since, the liquid assets are greater than the debt that has to be paid in the near future.
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