Chapter 1, Problem 1.6APR

Missing amounts from financial statements

The financial statements at the end of Wolverine Realty’s first month of operations are as follows:

Chapter 1 Introduction to Accounting and Business     47

Instructions

By analyzing the interrelationships among the four financial statements, determine the proper amounts for (a) through (r).

To determine

To Determine:  The missing amount in the given financial statement of Company WR.

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.

Statement of Stockholders’ Equity: The financial statement, which shows the changes in the equity capital, due to contributions and net income for a given period, is known as statement of stockholders’ equity.

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.

The financial statement of Company WR for month ended April 30, 20Y0, is given below.

Company WR
Income Statement
For the month ended April 30 , 20Y0
Particulars	Amount ($)	Amount ($)
Revenues
Fees earned		(a)   $750,000
Expenses
Wages expense	$300,000
Rent expense	$100,000
Supplies expense	(b)   $30,000
Utilities expense	$20,000
Miscellaneous expense	$25,000
Total expenses		$475,000
Net income		$275,000

Table (1)

Hence the net income of Company WR for month ended April 30, 20Y0, is $275,000.

Company WR
Statement of Stockholders’ Equity
For the month ended April 30, 20Y0
Particulars	Amount ($)	Amount ($)
Balance, April 1, 20Y0		(c)   $0
Net income for the month	(d)   $275,000
Deduct - Dividends	$125,000
Changes in Retained earnings		(e)   $150,000
Balance April 30, 20Y0		(f)   $150,000

Table (2)

Hence the retained earnings for month ended April 30, 20Y0, is $150,000.

Company WR
Balance Sheet
April 30, 20Y0
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$462,500
Supplies	$12,500
Land	$150,000
Total current assets		(g)   $625,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable		$100,000
Stockholder's equity
Common Stock	$375,000
Retained earnings	(h)   $150,000
Total stockholders’ equity		(i)   $525,000
Total liabilities and stockholders’ equity		(j)   $625,000

Table (3)

Hence the financial statement of Company WR shows the same asset and total liabilities and stockholder's equity balance of $625,000 for month ended April 30, 20Y0.

Company WR
Statement of Cash Flows
For the month ended April 30 , 20Y0
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers		(k)   $750,000
Cash payments for expenses and creditors	$387,500
Net cash flow provided by operating activities		(l)   $362,500
Cash flows from investing activities:
Cash payment for purchase of land		(m)   $150,000
Cash flows from financing activities:
Cash received from issuing common stock	(n)   $375,000
Cash Dividends	(o)   $125,000
Net cash flow from financing activities		(p)   $250,000
Net Increase in cash, April 31, 20Y0 cash balance		(q)   $462,500
Cash balance, April 1, 20Y0		$462,500
Cash balance, April 30, 20Y0		(r)   $925,000

Table (4)

Hence the cash balance of Company WR on April 30, 20Y0, is $462,500.

Working Notes:

1. a) Fees Earned: Fees earned during the month of April is $750,000.

   Calculate the fees earned.

   $\begin{array}{c}\text{Net Income = Revenue }-\text{ Expense}\\ \text{Revenue = NetIncome + Expense}\\ \text{= \$475,000 + \$275,000}\\ \text{= \$750,000}\end{array}$

(a)

1. b) Supplies expense: Supplies expense during the month of April is $30,000.

Calculate the supplies expense.

$\begin{array}{c}\text{Expenses = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Wage}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Rent}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Supplies}\\ \text{Expense}\end{array}\right)+\\ \left(\begin{array}{l}\text{Utilites}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Miscellaneous}\\ \text{Expense}\end{array}\right)\end{array}\right]\\ \$475,000=\$300,000+\$100,000\text{+}\left(\begin{array}{l}\text{Supplies}\\ \text{Expense}\end{array}\right)+\$20,000+\$25,000\\ \$475,000=\$445,000\text{+}\left(\text{Supplies Expense}\right)\\ \text{Supplies Expense}=\$475,000-\$445,000\\ =\$30,000\\ \end{array}$

(b)

1. c) Retained earnings, April 1, 20Y0: As this is the first month of operation for Company WR, there will be no opening balance for the retained earnings.

   (c)

2. d) Net income for April:  Net income provided in the income statement, is transferred to the statement of owner's equity.

   (d)

3. e) Change in retained earnings: Increase in retained earnings is $150,000.

   Calculate the increase on owner's equity of Company WR.

   $\begin{array}{c}\begin{array}{l}\text{Increase in}\\ \text{Retained earnings}\end{array}\}\text{ = }\left[\left(\text{Net Income}\right)-\left(\text{Dividends}\right)\right]\\ =\$275,000-\$125,000\\ =\$150,000\end{array}$

(e)

1. f) Retained earnings, April 30, 20Y0 The retained earnings on April 30, 20Y0 is the same as increase of retained earnings as there was no opening balance. The retained earnings on April 30, 20Y0 is $150,000

   (f)

2. g) Total Assets: The sum of total assets is $625,000.

   Calculate the total assets.

   $\begin{array}{c}\text{Total assets = Cash +Supplies + Land}\\ \text{= \$462,500+ }\$12,500+\$150,000\\ =\$625,000\end{array}$

(g)

1. h) Retained earnings: Retained earnings is calculated in the statement of retained earnings and transferred to balance sheet.

   (h)

2. i) Total stockholders’ equity: Total stockholder's equity is $525,000.

Calculate the total liabilities and owner's equity.

$\begin{array}{c}\text{Total stockholder's equity}\}\text{ = Common Stock +}\text{}\text{Retained Earnings}\\ \text{= }\$375,000\text{ + \$150,000}\\ =\$525,000\end{array}$ (i)

1. j) Total liabilities and stockholders’ equity: Total liabilities and stockholder's equity is $625,000.

Calculate the total liabilities and owner's equity.

$\begin{array}{c}\begin{array}{l}\text{Total liabilities and}\\ \text{stockholder's equity}\end{array}\}\text{ = Total Liabilities +}\text{}\text{Total stockholder equity}\\ \text{= }\$100,000\text{ + \$525,000}\\ =\$625,000\end{array}$

(j)

1. k) Cash from customers: This includes all the income generated and received, in the form of cash in the month of April, is $750,000 and it is transferred from income statement.

   (k)

2. l) Net cash flow used for operating activities: The cash flow used for operating activities in the month of April, is $362,500.

Calculate the cash flow used for operating activities.

$\begin{array}{c}\begin{array}{l}\text{Cash flow used for}\\ \text{operating activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash receipts}\\ \text{from customers}\end{array}\right)-\left(\begin{array}{l}\text{Cash payments for}\\ \text{expenses and creditors}\end{array}\right)\right]\\ \text{= \$750,000 }-\text{ \$387,500}\\ \text{= \$362,500}\end{array}$

(l)

1. m) Cash payment for acquisition of land: The land was purchased for $150,000, and this amount is transferred from the balance sheet.

   (m)

2. n) Cash received from issuing common stock: This refers to the investment made by the owner in April and this amount is transferred from the statement of owner's equity. Cash received from issuing common stock is $375,000.

   (n)

3. o) Cash Dividends: This refers to the dividend paid to the owner in April and this amount is transferred from the statement of retained earnings. Cash dividends paid during April is $125,000.

   (o)

4. p) Net cash flow from financing activities; the cash flow from financing activities in the month of April, is $250,000.

Calculate the net cash flow from financing activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flow from}\\ \text{financing activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash received from}\\ \text{issuing common stock}\end{array}\right)-\left(\text{Cash Dividends}\right)\right]\\ \text{= \$375,000 }-\text{ \$125,000}\\ \text{= \$250,000}\end{array}$

(p)

1. q) Net Increase in cash, April 30, 20Y0 cash balance is $462,500 and it is transferred from balance sheet.

   (q)

2. r) Cash balance, April 30, 20Y0 is calculated by adding the net increasing cash with beginning cash balance. Hence, the cash balance, April 30, 20Y0 is $925,000.

   (r)