Chapter 1, Problem 7PSA

To determine

Accounting Equation:

The assets, liabilities and equity relation, are known as the accounting equation. Assets are the resources of company and that increase as business expand whereas liabilities are the burden on company that has to pay in future. Equity means the owner claim on assets. An accounting equation represent the assets of the company are equal to the liabilities and equity of the company.

In can be represented as follows,

  $$

  $\text{Assets}=\text{Liabilities}+\text{Equity}$

Income Statement:

It includes the information of net income earn or net loss suffered by the company. The expenses deducting from revenue and the resultant is net income or loss to the company. This is informative report that helps the user of financial information to take decision.

Statement of Retained Earnings:

It is the part of financial statement of the company, that contained information related to retained earnings. Retained earnings are the amount that a company wants to keep aside for internal usage of the company. That will not pay in the form of dividends to the shareholders and kept by the company aside, to pay debts or further investment.

Balance Sheet:

It is a part of the Financial Statement of a company, which shows the financial position of the company as from where the company receive the money (assets) and to whom the company has to pay. (liabilities and shareholders').While purchase a share in the company the investor will firstly see the balance sheet of the respective company than only decide whether he purchase the share or not.

Statement of Cash Flows:

This statement records the inflows and outflows of cash and funds of the Company during the accounting period.

It has following three parts:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities

1.

To identify: The effect of given transactions on the accounting equation.

Explanation of Solution

  

     Table (1)

Hence, the cash balance is $42,780, office equipment is $1,890, accounts payable is $80, common stock is $40,000, dividend is $1,400, revenue is $11,100 and expenses is $5,110.

2.

To determine

To prepare: The income statement, statement of retained earnings and balance sheet.

Explanation of Solution

Prepare income statement.

G. Company
Income Statement
For the month ended May 31,20XX
Particulars	Amount($)	Amount($)
Revenue:
Service Revenue	11,100
Total Revenue		11,100
Expenses:
Advertising Expenses	80
Cleaning Expenses	750
Rent Expenses	2200
Salary Expenses	1,500
Telephone Expenses	300
Utilities Expenses	280
Total Expense		5,110
Net income		5,990

     Table (2)

Hence, net income of .G Company as on May 31, 20XX is $5,990.

Prepare statement of retained earnings.

G. Company
Retained Earnings Statement
For the month ended May 31,20XX
Particulars	Amount($)
Opening balance	0
Net income	5,990
Total	5,990
Dividends	(1,400)
Retained earnings	4,590

     Table (3)

Hence, the retained earnings of G Company as on May 31, 20XX are $4,590.

Prepare balance sheet.

G. Company
Balance Sheet
As on May 31, 20XX
Particulars		Amount($)
Assets
Cash		42,780
Equipment		1,890
Total assets		44,670
Liabilities and stockholder’s equity
Liabilities
Accounts payable		80
Stockholder’s equity
Common stock	40,000
Retained earnings	4,590
Total stockholders’ equity		44,590
Total Liabilities and Stockholder’s equity		44,670

     Table (4)

Hence, the total of the balance sheet of the G Company as on May 31, 20XX is of $44,670.

3.

To determine

To prepare: The statement of cash flows of the M Company.

Explanation of Solution

Prepare the cash flow statement.

G. Company
Statement of Cash Flows
Month Ended May 31, 20XX
Particulars	Amount($)	Amount($)
Cash flow from operating activities
Receipts:
Collections from customers		11,100
Payments:
Cleaning Expenses	(750)
Rent Expenses	(2200)
Salary Expenses	(1,500)
Telephone Expenses	(300)
Utilities	(280)	(5,030)
Net cash from operating activities		6,070
Cash flow from investing activities
Purchase of equipment	(1,890)
Net cash from investing activities		(1,890)
Cash flow from financing activities
Issued common stock	40,000
Less: Payment of cash dividends	(1,400)
Net cash from financing activities		38,600
Net increase in cash		42,780
Cash balance, May 1,20XX		0
Cash balance, May 31,20XX		42,780

     Table (5)

Hence, the cash balance of the G Company as on May 31, 20XX is $42,780.