Chapter 7, Problem 3CP

To determine

Introduction:

General Purpose Financial Statements:

• Financial statements are financial records of the entities transactions for a given reporting period and indicate the financial health of an entity. They comprise of:

1. Income Statements and Notes to Income Statement,

2. Statement of Shareholders’ Equity.

3. Balance Sheets and,

• Income Statements and Notes to Income Statement record the results of the company’s operations during a particular reporting period and provide information about the sources of funds and expenses of an entity.

• The sources of incomes are revenues from sales of goods and services and expenses are in the form of direct and indirect cost of operations. Surplus or deficit of the incomes over expenses is carried forward to the Balance sheet.

• Balance Sheet is a list of the closing balance of assets, liabilities and equity of an entity as on a particular date and it is used for analysis of the financial health of the entity.

• Assets have a debit balance and are responsible for direct or indirect revenue generation or cost reduction. Liabilities are obligations of the business incurred during the reporting period. Equity comprises of the retained earnings and equity capital invested in the entity.

• The sources of incomes are revenues from sales of goods and services and expenses are in the form of direct and indirect cost of operations. Surplus or deficit of the incomes over expenses is carried forward to the Balance sheet and form part of the retained earnings.

To Prepare:

a) Income Statement

b) Statement of Owner’s Equity

c) Balance Sheet

Answer to Problem 3CP

Solution:

Income Statement
For the Year Ended May 31, 2017
Particulars	Amount ($)	Amount ($)
Revenues:
Sales Revenue	$ 156,422.00
Total Revenue		$ 156,422.00
Less: Expenses
Cost of Goods Sold	$ 99,910.00
Depreciation Expense - Office Equipment	$ 567.00
Depreciation Expense - Store Equipment	$ 329.00
Insurance Expense	$ 553.00
Office Rent	$ 742.00
Office salaries	$ 6,300.00
Office Supplies Expense	$ 289.00
Sales Discount	$ 350.00
Sales Rent	$ 2,968.00
Sales Returns	$ 175.00
Sales Salaries	$ 10,640.00
Store Supplies Expense	$ 669.00
Utilities Expense	$ 1,283.00
Total Expenses		$ 124,775.00
Net Income transferred to capital account		$ 31,647.00

Statement of Owner's Equity
For the Year Ended May 31, 2017
Particulars	Amount ($)
Opening Balance	$308,085.00
Add: Profit for the year	$ 31,647.00
Less: Withdrawals	$7,000.00
Closing Balance	$332,732.00

Balance Sheet
For the Year Ended May 31, 2017
Assets		Amount	Liabilities and Owners Equity		Amount
Current Assets			Current Liabilities
Accounts receivable	$18,200.00		Accounts Payable	$53,059.00
Merchandise inventory	$189,519		Current Liabilities, Net		$53,059
Office supplies	$504
Store supplies	$2,632
Prepaid insurance	$2,765
Cash and Bank Balances	$135,911
Current Assets, Net		$349,531
Fixed Assets			Owner's Equity
Office Equipment	$25,690.00		Balance of Owner's Equity		$332,732.00
Store Equipment	$38,920.00
Less: Accumulated Depreciation (Equipment)	($28,350.00)
Fixed Assets, Net		$36,260.00
Total Assets		$385,791	Total Liabilities and Equity		$385,791

Explanation of Solution

Closing Balances are derived from the T-Accounts as detailed below:

Dr.	Cash				Cr.
Date		Amount ($)	Date		Amount ($)
May 1	Opening Balance	$ 50,247.00	May 31		$ 57,108.00
May 31		$ 142,772.00
	Balance	$ 135,911.00
Dr.	Accounts Receivable				Cr.
May 1	Opening Balance	$ 4,725.00	May 2		$ 175.00
May 31		$ 31,150.00	May 31		$ 17,500.00
	Balance	$ 18,200.00
Dr.	Merchandise Inventory				Cr.
May 1	Opening Balance	$ 220,080.00	May 31		$ 798.00
May 31		$ 70,722.00	May 31		$ 575.00
			May 31		$ 80,700.00
			May 31		$ 19,210.00
	Balance	$ 189,519.00
Dr.	Office Supplies				Cr.
May 1	Opening Balance	$ 430.00	May 31		$ 289.00
May 31		$ 363.00
	Balance	$ 504.00
Dr.	Store Supplies				Cr.
May 1	Opening Balance	$ 2,447.00	May 9		$ 350.00
May 4		$ 574.00	May 31		$ 669.00
	Balance	$ 2,632.00
Dr.	Prepaid Insurance				Cr.
May 1	Opening Balance	$ 3,318.00	May 31		$ 553.00
	Balance	$ 2,765.00
Dr.	Office Equipment				Cr.
May 1	Opening Balance	$ 22,470.00	May 12		$ 854.00
May 10		$ 4,074.00
	Balance	$ 25,690.00
Dr.	Accumulated Depreciation, Office Equipment				Cr.
			May 1	Opening Balance	$ 9,898.00
			May 31		$ 329.00
				Balance	$ 10,227.00
Dr.	Accumulated Depreciation, Store Equipment				Cr.
			May 1	Opening Balance	$ 17,556.00
			May 31		$ 567.00
				Balance	$ 18,123.00
Dr.	Accounts Payable				Cr.
May 3		$ 798.00	May 1	Opening Balance	$ 7,098.00
May 12		$ 854.00	May 31		$ 76,363.00
May 31		$ 28,750.00
				Balance	$ 53,059.00
Dr.	Capital				Cr.
May 31		$ 7,000.00	May 1	Opening Balance	$ 308,085.00
			May 31		$ 31,647.00
				Balance	$ 332,732.00
Dr.	Drawings				Cr.
May 29		$ 7,000.00	May 31		$ 7,000.00
					$ -
	Balance	$ -
Dr.	Sales				Cr.
May 31		$ 156,422.00	May 31		$ 31,150.00
			May 31		$ 125,272.00
				Balance	$ -
Dr.	Sales Returns				Cr.
May 31		$ 175.00	May 31		$ 175.00
	Balance	$ -
Dr.	Sales Discounts				Cr.
May 31		$ 563.00	May 31		$ 563.00
	Balance	$ -
Dr.	Office Salaries				Cr.
May 15		$ 3,150.00	May 31		$ 6,300.00
May 30		$ 3,150.00
	Balance	$ -
Dr.	Sales Salaries				Cr.
May 15		$ 5,320.00	May 31		$ 10,640.00
May 30		$ 5,320.00
	Balance	$ -
Dr.	Insurance Expense				Cr.
May 31		$ 553.00	May 31		$ 553.00
	Balance	$ -
Dr.	Office Rent				Cr.
May 31		$ 742.00	May 31		$ 742.00
	Balance	$ -
Dr.	Sales Rent				Cr.
May 31		$ 2,968.00	May 31		$ 2,968.00
	Balance	$ -
Dr.	Office Supplies				Cr.
May 31		$ 289.00	May 31		$ 289.00
	Balance	$ -
Dr.	Store Supplies				Cr.
May 31		$ 669.00	May 31		$ 669.00
	Balance	$ -
Dr.	Utilities				Cr.
May 31		$ 1,283.00	May 31		$ 1,283.00
	Balance	$ -
Dr.	Income Summary				Cr.
May 31		$ 124,775.00	May 31		$ 156,422.00
May 31		$ 31,647.00
	Balance	$ -

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• In the case of expense accounts and revenue accounts, balances are not carried forward. They are instead transferred to the Income Summary and then the net balance of the Income Summary is transferred to the capital Account.

• Expenses such as Salary, Interest, Rent etc. are transferred to the Income Statement and the net Balance of the Retained Earnings is carried forward to the income statement. Incomes are credited to the Income Summary and expenses are debited to the Income Summary.

• Drawings and withdrawals are reduced from the balance of capital for the year and are not carried forward to subsequent periods.

• Capital contributions in the form of additional capital introduced during the year and Profit as a result of operations is added to the balance of capital for the year.

• Assets and Liabilities of similar nature are grouped and valued together. Example: Current Assets, Long term Liabilities etc. Doing so ensures consistency in financial statements and also indicates where the funds of the business are being utilized.

• Balances of Incomes and expenses are transferred to the Income statement to close the accounts for the year. The balance of retained earnings is then transferred to the capital account.

• Balance sheet for the year is prepared by compiling the list of assets and liabilities of the entity at the end of the reporting period and classifying them as per their nature.

Conclusion

Hence the Income Statement, Statement of Owner’s Equity and Balance Sheet are prepared.