Chapter 1, Problem 1.5APR

Transactions; financial statements

D’Lite Dry Cleaners is owned and operated by Joel Palk. A building and equipment are currently being rented, pending expansion to new facilities. The actual work of dry cleaning is done by another company at wholesale rates. The assets, liabilities, and common stock of the business on July 1, 2018, are as follows: Cash, $45,000; Accounts Receivable, $93,000; Supplies, $7,000; Land, $75,000; Accounts Payable, $40,000; Common Stock, $60,000. Business transactions dur­ing July are summarized as follows:

• A. Joel Palk invested additional cash in exchange for common stock with a deposit of $35,000 in the business bank account.
• B. Paid $50,000 for the purchase of land adjacent to land currently owned by D'Lite Dry Cleaners as a future building site.

C. Received cash from customers for dry cleaning revenue, $32,125.

• D. Paid rent for the month, $6,000.
• E. Purchased supplies on account, $2,500.
• F. Paid creditors on account, $22,800.
• G. Charged customers for dry cleaning revenue on account, $84,750.
• H.  Received monthly invoice for dry cleaning expense for July (to be paid on August 10), $29,500.
• I. Paid the following: wages expense, $7,500; truck expense, $2,500; utilities expense, $ 1,300; miscellaneous expense, $2,700.

J. Received cash from customers on account $88,000.

K. Determined that the cost of supplies on hand was $5,900; therefore, the cost of supplies used during the month was $3,600.

L. Paid dividends, $ 12,000.

Instructions

1.    Determine the amount of retained earnings as of July 1, 2018.

2.    State the assets, liabilities, and stockholders’ equity as of July 1 in equation form similar to that shown in this chapter. In tabular form below the equation, indicate increases and decreases resulting from each transaction and the new balances after each transaction.

3.    Prepare an income statement for July, a retained earnings statement for July, and a balance sheet as of July 31.

4.    (Optional) Prepare a statement of cash flows for July.

To determine

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:

Assets = Liabilities + Shareholders Equity

The retained earnings for DD Cleaners as on July 1, 2018.

Explanation of Solution

Calculate the retained earnings for DD Cleaners as on July 1, 2018.

$\begin{array}{c}\text{Assets }=\text{Liabilities}+\text{Owner's Equity}\\ \left(\begin{array}{l}\text{Cash+Accounts Receivable}\\ \text{+Supplies+Land}\end{array}\right)\text{= Liabilities}+\left[\text{Common Stock +Retained earnings}\right]\\ \left(\begin{array}{l}\text{\$45,000}+\text{\$93,000}+\\ \text{\$7,000}+\text{\$75,000}\end{array}\right)\text{= \$40,000 + (\$60,000+Retained earnings})\\ \text{\$220,000 }=\text{\$40,000 + (\$60,000 + Retained earnings})\\ \text{\$220,000}-\text{\$40,000 = \$60,000 + Retained earnings}\\ \text{Retained earnings}=\$180,000-\text{\$60,000}\\ =\text{\$120,000}\end{array}$

The retained earnings, for DD Cleaners as on July 1, 2018 are $120,000.

To determine

To Indicate: The effect of each given transaction of DD Cleaners on the accounting equation.

Explanation of Solution

Business transaction: Business transaction is a record of any economic activity, resulting in the change in the value of the assets, the liabilities, and the Shareholder’s equities, of a business. Business transaction is also referred to as financial transaction.

Indicate the effect of the given transactions of DD Cleaners.

(Figure – 1)

To determine

To Prepare: The financial statements for DD Cleaners for the month ended July 31, 2018.

Explanation of Solution

Financial statements: Financial statements refer to those statements, which are prepared by the Company according to particular formats in accounting to show its financial position.

Financial statements include the following statements:

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Prepare the income statement of DD Cleaners for the month ended July 31, 2018.

DD Cleaners
Income Statement
For the month ended July 31, 2018
Particulars	Amount ($)	Amount ($)
Revenues
Dry cleaning revenue		$116,875
Expenses
Dry Cleaning expense	$29,500
Wages expense	$7,500
Rent expense	$6,000
Supplies expense	$3,600
Truck expense	$2,500
Utilities expense	$1,300
Miscellaneous expense	$2,700
Total expenses		$53,100
Net income		$63,775

Table (1)

Hence, the net income of DD Cleaners for the month ended July 31, 2018 is $63,775.

Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.

Prepare the statement of Retained earnings for DD Cleaners for the month ended July 31, 2018.

DD Cleaners
Statement of Retained Earnings
For the month ended July 31, 2018
Particulars	Amount ($)	Amount ($)
Retained earnings, July 1, 2018		$120,000
Net income for the year	$63,775
Deduct - Dividends	$12,000
Increase in Retained earnings		$51,775
Retained earnings, April 30, 2018		$171,775

Table (2)

Hence, the retained earnings of DD Cleaners for the month ended July 31, 2018 are $171,775.

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the balance sheet of DD Cleaners for the month ended July 31, 2018.

DD Cleaners
Balance Sheet
July 31, 2018
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$95,325
Accounts receivable	$89,750
Supplies	$5,900
Land	$125,000
Total current assets		$315,975
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable		$49,200
Owner's equity
Common Stock	$95,000
Retained earnings	$171,775
Total liabilities and stockholders’ equity		$315,975

Table (3)

The balance sheet of DD Cleaners shows asset balance of $315,975 which is same as the balance of liabilities and owner's equity.

To determine

To Prepare: The statement of cash flow for DD Cleaners for the month ended July 31, 2018.

Answer to Problem 1.5APR

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.

Prepare the statement of cash flows for DD Cleaners for the month ended July 31, 2018.

DD Cleaners
Statement of Cash Flows
For the month ended July 31, 2018
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers		$120,125
Cash payments for expenses (1)	$20,000
Payments to creditors	$22,800	$42,800
Net cash flow used for operating activities		$77,325
Cash flows from investing activities:
Cash payment for purchase of land		(-)  $50,000
Cash flows from financing activities:
Cash receipt of owner’s investment	$35,000
Deduct - Withdrawals	(-)  $12,000
Net cash flow from financing activities		$23,000
Net Increase in cash during July		$50,325
Cash Balance on July 1, 2018		$45,000
Cash Balance on July 31, 2018		$95,325

Table (4)

The statement of cash flows for DD Cleaners for the month ended July 31, 2018, shows cash balance of $95,325 on July 31, 2018

Explanation of Solution

Working Note:

Calculate the expenses made through cash payments.

$\begin{array}{c}\begin{array}{l}\text{Expenses paid for}\\ \text{using cash}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Wage}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Rent}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Truck}\\ \text{Expense}\end{array}\right)+\\ \left(\begin{array}{l}\text{Utilites}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Miscellaneous}\\ \text{Expense}\end{array}\right)\end{array}\right]\\ =\$7,500+\$6,000+\$2,500+\$1,300+\$2,700\\ =\$20,000\end{array}$ (1)