Chapter 1, Problem 6PB

The financial statements at the end of Atlas Realty’s first month of operations follow:

Instructions

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

To determine

Calculate the missing amount in the given financial statement of Company AR.

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 owner's’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owner's’ 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 AR or month ended May 31, 2019, is given below.

Company AR
Income Statement
For the month ended May 31 , 2019
Particulars	Amount ($)	Amount ($)
Revenues
Fees earned		$400,000
Expenses
Wages expense	(a)   $203,200
Rent expense	$48,000
Supplies expense	$17,600
Utilities expense	$14,400
Miscellaneous expense	$4,800
Total expenses		$288,000
Net income		(b)   $112,000

Table (1)

Hence the net income of Company AR for month ended May 31, 2019, is $112,000.

Company AR
Statement of Owner's Equity
For the month ended May 31 , 2019
Particulars	Amount ($)	Amount ($)
LM Capital, May 1, 2019		(c)   $0
Investment on May 1,2019	(d)   $160,000
Net income for the month	(e)   $112,000
Deduct - Withdrawals	(f)   $64,000
Increase in Owner's equity		(g)   $208,000
LM Capital, May 31 , 2019		(h)   $208,000

 Table (2)

Hence the LM Capital of Company AR for month ended May 31, 2019, is $208,000.

Company AR
Balance Sheet
May 31, 2019
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$123,200
Supplies	$12,800
Land	(i)   $120,000
Total current assets		(j)   $256,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$48,000
Owner's equity
LM Capital	(k)   $208,000
Total liabilities and stockholders’ equity		(l)   $256,000

 Table (3)

Hence the financial statement of Company AR shows the same asset and total liabilities and stockholder's equity balance of $256,000 for month ended May 31, 2019.

Company AR
Statement of Cash Flows
For the month ended May 31 , 2019
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers		(m)   $400,000
Cash payments for expenses and creditors	$252,800
Net cash flow used for operating activities		(n)   $147,200
Cash flows from investing activities:
Cash payment for purchase of land		$120,000
Cash flows from financing activities:
Cash receipt of owner’s investment	$160,000
Cash Withdrawals	$64,000
Net cash flow from financing activities		(o)   $96,000
Net Increase in cash, May 31,2019 cash balance		(p)   $123,200

 Table (4)

Hence the cash balance of Company AR on May 31, 2019, is $123,200.

Working Notes:

1. a) Wages expense: Wages expense during the month of May is $203,200.

Calculate the supplies expense.

$\begin{array}{c}\text{Expenses = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Wage}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Rent}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Supplies}\\ \text{Expense}\end{array}\right)+\\ \left(\begin{array}{l}\text{Utilites}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Miscellaneous}\\ \text{Expense}\end{array}\right)\end{array}\right]\\ \$288,000=\left(\begin{array}{l}\text{Wages}\\ \text{Expense}\end{array}\right)+\$48,000+\$17,600+\$14,400+\$4,800\\ \$288,000=\$84,800\text{+}\left(\text{Supplies Expense}\right)\\ \text{Supplies Expense}=\$288,000-\$84,800\\ =\$203,200\end{array}$

1. b) Net income: Net income during the month of May is $112,000.

   Calculate the net income.

   $\begin{array}{c}\text{Net Income = Revenue }-\text{ Expense}\\ \text{= \$400,000 }-\text{ \$288,000}\\ \text{= \$112,000}\end{array}$

2. c) LM Capital, May 1, 2019:  As this is the first month of operation for Company AR, there will be having no opening balance for the Capital account.
3. d) Investment on May 1, 2019: The investment received from the owner is shown in the statement of cash flow and transferred from there. The investment received from the owner is $160,000.
4. e) Net income for May: Net income  provided in the income statement is transferred to the statement of owner's equity. Net income during the month of May is $112,000.
5. f) Withdrawals: Withdrawals of $64,000, shown in the statement of cash flow is transferred to the statement of owner's equity.
6. g) Increase in Owner's equity: Increase in owner's equity during May is $208,000.

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

   $\begin{array}{c}\begin{array}{l}\text{Increase in}\\ \text{Owner's Equity}\end{array}\}\text{ = }\left[\left(\text{Investment}\right)\text{+}\left(\text{Net Income}\right)-\left(\text{Withdrawals}\right)\right]\\ =\$160,000+\$112,000-\$64,000\\ =\$272,000-\$64,000\\ =\$208,000\end{array}$

7. h) LM Capital, May 31, 2019: The LM Capital on May 31, 2019 is the same as increase of Owner's equity as there was no opening balance. The LM Capital on May 31, 2019 is $208,000
8. i) Land: Land of $120,000, shown in the statement of cash flow is transferred to the balance sheet.
9. j) Total Assets: The sum of total assets is $256,000.

   Calculate the total assets.

   $\begin{array}{c}\text{Total assets = Cash +Supplies + Land}\\ \text{= }\$123,200\text{ + }\$12,8000+\$120,000\\ =\$256,000\end{array}$

10. k) LM Capital:  LM Capital of $208,000, calculated in the statement of owner's equity is transferred to the balance sheet.
11. l) Total liabilities and stockholders’ equity: the total liabilities and stockholder's equity is $256,000.

    Calculate the total liabilities and owner's equity.

    $\begin{array}{c}\begin{array}{l}\text{Total liabilities and}\\ \text{stockholder's equity}\end{array}\}\text{ = Total Liabilities +}\text{}\text{Total stockholder equity}\\ \text{= }\$48,000\text{ + \$208,000}\\ =\$256,000\end{array}$

12. m) Cash receipts from customers: This includes all the income generated and received in the form of cash in the month of May, is $400,000 and it is transferred from income statement.
13. n) Net cash flow used for operating activities: The cash flow used for operating activities in the month of May, is $362,500.

Calculate the cash flow used for operating activities.

$\begin{array}{c}\begin{array}{l}\text{Cash flow used for}\\ \text{operating activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash receipts}\\ \text{from customers}\end{array}\right)-\left(\begin{array}{l}\text{Cash payments for}\\ \text{expenses and creditors}\end{array}\right)\right]\\ \text{= \$400,000 }-\text{ \$252,800}\\ \text{= \$147,200}\end{array}$

1. o) Net cash flow from financing activities; the cash flow from financing activities in the month of May, is $96,000.

Calculate the net cash flow from financing activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flow from}\\ \text{financing activities}\end{array}\}\text{ = }\left[\left(\begin{array}{l}\text{Cash receipt of}\\ \text{owner investment}\end{array}\right)-\left(\text{Cash Withdrawals}\right)\right]\\ \text{= \$160,000 }-\text{ \$64,000}\\ \text{= \$96,000}\end{array}$

1. p) Net Increase in cash, May 31, 2019 cash balance is $123,200 and it is transferred from balance sheet.