Chapter 1, Problem 9PSB

Analyzing transactions and preparing financial statements C4 P1 P2
Rivera Roofing Company, owned by Reyna Rivera, began operations in July and completed these transactions during that first month of operations.
July 1 Reyna Rivera invested $80,000 cash in the company in exchange for its common stock.
2 The company rented office space and paid $700 cash for the July rent.
3 The company purchased roofing equipment for $5,000 by paying $1,000 cash and agreeing to pay the $4,000 balance in 30 days.
6 The company purchased office supplies for $600 cash.
8 The company completed work for a customer and immediately collected $7,600 cash for the work.
10 The company purchased $2,300 of office equipment on credit.
15 The company completed work for a customer on credit in the amount of $8,200.
17 The company purchased $3,100 of office supplies on credit.
23 The company paid $2,300 cash for the office equipment purchased on July 10.
25 The company billed a customer $5,000 for work completed; the balance is due in 30 days.
28 The company received $8,200 cash for the work completed on July 15.
30 The company paid an assistant's salary of $1,560 cash for this month.
31 The company paid $295 cash for this month's utility bill.
31 The company paid $1,800 cash in dividends to the owner (sole shareholder).
Required
Create the following table similar to the one in Exhibit 1.9.
$\text{Date}\frac{\text{Assets}}{\text{Cash}+\text{Accounts}\text{Receivable}+\text{Office}\text{Supplies}+\text{Office}\text{Equipment}+\text{Roofing}\text{Equipment}}\begin{array}{c}=\\ =\end{array}\frac{\text{Liabilities}}{\text{Accounts}\text{Payable}}\begin{array}{c}+\\ +\end{array}\frac{\text{Equity}}{\text{Common}\text{Stock}-\text{Dividens}+\text{Revenues}-\text{Expenses}}$

1. 
   Use additions and subtractions within the table to show the dollar effects of each transaction on individual items of the accounting equation. Show new balances after each transaction.
   Check (1) Ending balances: Cash, $87,545; Accounts Payable, $7,100
2. Prepare the income statement and the statement of retained earnings for the month of July, and the balance sheet as of July 31.
   (2) Net income, $18,245;Total assets, $103,545
3. Prepare the statement of cash flows for the month of July.

Analysis Component

4. Assume that the $5,000 purchase of roofing equipment on July 3 was financed from an owner investment of another $5,000 cash in the business in exchange for more common stock (instead of the purchase conditions described in the transaction above). Compute the dollar effect of this change on the month-end amounts for(a) total assets,(b) total liabilities, and(c) total equity.

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 parts:

• 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 $87,545,accounts receivables is $5,000, office supplies is $3,700 office equipment is $2,300,roofing equipment is$5,000 accounts payable is $7,100, common stock is $80,000, dividend is $1,800, revenue is $20,800 and expenses is $2,555.

To determine

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

Explanation of Solution

Prepare income statement.

R. Company
Income Statement
For the month ended July 31,20XX
Particulars	Amount($)	Amount($)
Revenue:
Service Revenue	20,800
Total Revenue		20,800
Expenses:
Rent Expenses	700
Salary Expenses	1,560
Utilities Expenses	295
Total Expense		2,555
Net income		18,245

     Table (2)

Hence, net income of .R Company as on July 31, 20XX is $18,245

Prepare statement of retained earnings

R. Company
Retained Earnings Statement
For the month ended July 31,20XX
Particulars	Amount($)
Opening balance	0
Net income	18,245
Total	18,245
Dividends	(1,800)
Retained earnings	16,445

     Table (3)

Hence, the retained earnings of .R Company as on July 31, 20XX are $16,445.

Prepare balance sheet

R. Company
Balance sheet
As on July 31, 20XX
Particulars		Amount($)
Assets
Cash		87,545
Accounts Receivables		5,000
Office Supplies		3,700
Office Equipment		2,300
Roofing Equipment		5,000
Total Assets		103,545
Liabilities and Stockholder’s Equity
Liabilities
Accounts Payable		7,100
Stockholder’s Equity
Common Stock	80,000
Retained earnings	16,445
Total stockholders’ equity		96,445
Total Liabilities and Stockholder’s equity		103,545

     Table (4)

Hence, the total of the balance sheet of the R Company as on July 31, 20XX is of $103,545.

To determine

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

Explanation of Solution

Prepare the cash flow statement.

R. Company
Statement of Cash Flows
Month Ended July 31, 20XX
Particulars	Amount($)	Amount($)
Cash flow from operating activities
Receipts:
Collections from customers		15,800
Payments:
Supplies	(600)
Rent Expenses	(700)
Salary Expenses	(1,560)
Utilities	(295)	(3,155)
Net cash from operating activities		12,645
Cash flow from investing activities
Purchase of office equipment	(2,300)
Purchase of Roofing equipment	(1,000)
Net cash from investing activities		(3,300)
Cash flow from financing activities
Issued common stock	80,000
Less: Payment of cash dividends	(1,800)
Net cash from financing activities		78,200
Net increase in cash		87,545
Cash balance, July 1,20XX		0
Cash balance, July 31,20XX		87,545

     Table (5)

Hence, the cash balance of the R Company as on July 31, 20XX is $87,545.

To determine

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

Explanation of Solution

If the company purchase roofing equipment by owner investment instead of cash as mention in question.

• On assets- The asset of the company increases by $1,000.
• On liabilities- The liability of the company decreases by $4,000.
• On equity- The common stock is increased by $5,000 and common stock is the part of equity so equity increases by $5,000.

Thus, assets and equity will increase and liability will decrease.