Chapter 1, Problem 9PSA

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 follow,

  $$

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

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 components,

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

1.

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

Explanation of Solution

  

  

     Table (1)

Hence, the cash balance is $59,180,accounts receivables is $900, office supplies is $1,150 office equipment is $2,530,electrical equipment is$13,000 accounts payable is $8,550, common stock is $65,000, dividend is $950, revenue is $7,100 and expenses is $2,940.

2.

To determine

To prepare: The income statement, statement of retained earnings and balance sheet for the month of December 31,20XX.

Explanation of Solution

Prepare income statement.

S. Electric
Income Statement
For the month ended December 31,20XX
Particulars	Amount($)	Amount($)
Revenue:
Service Revenue	7,100
Total Revenue		7,100
Expenses:
Rent Expenses	1000
Salary Expenses	1,400
Utilities Expenses	540
Total Expense		2,940
Net income		4,160

     Table (2)

Hence, net income of .S Electric as on December 31, 20XX is $4,160.

Prepare statement of retained earnings.

S. Electric
Retained Earnings Statement
For the month ended December 31,20XX
Particulars	Amount($)
Opening balance	0
Net income	4,160
Total	4,160
Dividends	(950)
Retained earnings	3,210

     Table (3)

Hence, the retained earnings of S Electric as on December 31, 20XX are $3,210.

Prepare balance sheet.

S. Electric
Balance sheet
As on December 31, 20XX
Particulars		Amount($)
Assets
Cash		59,180
Accounts Receivables		900
Office Supplies		1,150
Office Equipment		2,530
Electric Equipment		13,000
Total Assets		76,760
Liabilities and Stockholder’s Equity
Liabilities
Accounts Payable		8,550
Stockholder’s Equity
Common Stock	65,000
Retained earnings	3,210
Total stockholders’ equity		68,210
Total Liabilities and Stockholder’s equity		76,760

     Table (4)

Hence, the total of the balance sheet of the S Electric as on December 31, 20XX is of $76,760.

3.

To determine

To prepare: The statement of cash flows of the S Electric.

Explanation of Solution

Prepare the cash flow statement.

S. Electric
Statement of Cash Flows
Month Ended December 31, 20XX
Particulars	Amount($)	Amount($)
Cash flow from operating activities
Receipts:
Collections from customers		6,200
Payments:
Supplies	(800)
Rent Expenses	(1,000)
Salary Expenses	(1,400)
Utilities	(540)	(3,740)
Net cash from operating activities		2,460
Cash flow from investing activities
Purchase of office equipment	(2,530)
Purchase of electric equipment	(4,800)
Net cash from investing activities		(7,330)
Cash flow from financing activities
Issued common stock	65,000
Less: Payment of cash dividends	(950)
Net cash from financing activities		64,050
Net increase in cash		59,180
Cash balance, December 1,20XX		0
Cash balance, December 31,20XX		59,180

     Table (5)

Hence, the cash balance of the S Electric as on December 31, 20XX is $59,180.

4.

To determine

To identify: The changes in (a) total assets, (b) total liabilities, and (c) total equity.

Explanation of Solution

If the owner of the company invests $49,000 cash instead of $65,000 for common stock and borrows $16,000 from the bank, then the effect on assets, liabilities and equity is,

• On assets- There is no change in assets, as in both the cases cash balance increases.
• On liabilities- There is an increase of $16,000 in accounts payable account and liability of S electric will increase.
• On equity- The common stock is decreased by $16,000 and common stock are the part of equity so equity decreases by $16,000.