Chapter 2, Problem 42BP

To determine

Find the missing amounts in the given financial statements.

Answer to Problem 42BP

Find the missing amounts in the given financial statements.

	Year 1	Year 2	Year 3
Income Statements
Revenue	$400	500	$800
Expense	(250)	(l) (400)	(425)
Net Income (Loss)	(a) $150	$100	$375
Statements of Changes in Stockholders’ Equity
Beginning Common Stock	$0	(m) $8,000	$9,100
Plus: Common Stock Issued	(b) 8,000	1,100	310
Ending Common Stock	8,000	9,100	(s) 9,410
Beginning Retained Earnings	0	25	75
Plus: Net Income (Loss)	(c) 150	100	375
Less: Dividends	(d) (125)	(50)	(150)
Ending Retained Earnings	25	(n) 75	300
Total Stockholders’ Equity	(e) $8,025	$9,175	(t) $9,710
Balance Sheets
Assets
Cash	(f) $11,000	(o) $6,650	(u)$8,050
Land	0	(p) 5,000	2,500
Total Assets	$11,000	$11,650	$10,550
Liabilities	(g) $2,975	(q) $2,475	$840
Stockholders’ Equity
Common Stock	(h) 8,000	(r) 9,100	9,410
Retained Earnings	(i) 25	75	300
Total Stockholders’ Equity	8,025	9,175	9,710
Total Liabilities and Stockholders’ Equity	$11,000	$11,650	$10,550
Statements of Cash Flows
Cash Flows From Operating Activities:
Cash Receipts from Customers	(j)$400	$500	(v) $800
Cash Payments for Expenses	(k) (250)	(400)	(w) (425)
Net Cash Flows from Operating Activities	150	100	375
Cash Flows From Investing Activities:
Cash Payments for Land	0	(5,000)	0
Cash receipt from sale of land	0	0	2,500
Net Cash Flows from investing Activities	0	(5,000)	2,500
Cash Flows From Financial Activities:
Cash Receipts from Loan	2,975	0	-0-
Cash Payments to Reduce Debt	0	(500)	(x) (1,635)
Cash Receipts from Stock Issue	8,000	1,100	(y) 310
Cash Payments for Dividends	(125)	(50)	(z) (150)
Net Cash Flows from Financial Activities	10,850	550	(1,475)
Net Change in Cash	11,000	(4,350)	1,400
Plus: Beginning Cash Balance	0	11,000	6,650
Ending Cash Balance	$11,000	$ 6,650	$ 8,050

Table (1)

Explanation of Solution

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Income statement:  it is one of the financial statements, which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period.

Statement of stockholder's equity: This statement reports the beginning stockholder's equity and all the changes which led to ending stockholder's equity. Additional capital, net income from income statement is added to and dividends are deducted from beginning stockholder's equity to arrive at the end result, closing balance of stockholder's equity.

Statement of cash flows: it is one of the financial statements which reports the source and application of cash between two balance sheet dates. It shows how the cash is sourced and used for the company’s operating, investing, and financing activities.

Compute the missing amounts:

1. a) Compute net income for Year 1.

   $\begin{array}{c}\text{Net Income =}\text{Revenue}-\text{Expense}\\ =\$400-\$250\\ =\$150\end{array}$

   Therefore, net income for Year 1 is $150.

2. b) Compute common stock issued in Year 1.

   $\begin{array}{c}\text{Common stock issued = Ending Common Stock}-\text{Opening Common stock}\\ \text{=}\text{\$8,000}-\text{\$0}\\ \text{=}\text{\$8,000}\end{array}$

   Therefore, common stock issued in Year 1 is $8,000.

3. c) Compute net income for Year 1.

   Net income for Year 1 is $150 (refer requirement a).

4. d) Compute the dividends for Year 1.

   $\begin{array}{c}\text{Dividends =}\text{Beginning Retained Earnings}+\text{Net Income}-\text{Ending Retained Earnings}\\ \text{=}\$0+\text{\$150}-\text{\$25}\\ \text{=}\$125\end{array}$

   Therefore, dividend amount for Year 1 is $125.

5. e) Compute the total stockholders’ equity.

   $\begin{array}{c}\text{Total Stockholders’ Equity = Ending Common Stock}\text{+ Ending Retained Earnings}\\ \text{=}\text{\$8,000}\text{+}\text{\$25}\\ \text{=}\text{\$8,025}\end{array}$

   Therefore, the total stockholders’ equity for Year 1 is $8,025.

6. f) Compute the cash balance for Year 1.

   Cash balance for the Year 1 is $11,000 (as given in the cash flow statement).

7. g) Compute the liabilities amount as on Year 1 balance sheet.

   $\begin{array}{c}\text{Liabilities =}\text{Total Liabilities and Stockholders Equity}-\text{Stockholders'}\text{Equity}\\ \text{=}\text{\$11,000}-\text{\$8,025}\\ \text{=}\text{\$2,975}\end{array}$

   Therefore, liabilities amount as on Year 1 balance sheet is $2,975.

8. h) Compute the common stock amount as on Year 1 balance sheet.

   Common stock issued during Year 1 is $8,000 (refer statement of changes in stockholders’ equity) and there is no beginning balance of common stock. Therefore $8,000 is the common stock amount as on Year 1 balance sheet.

9. i) Compute the retained earnings as on Year 1 balance sheet.

   $25 is reported has ending balance of retained earnings in the statement of changes in stockholders equity. Thus, $25 is the retained earnings as on Year 1 balance sheet.

10. j) Compute the cash receipts from customers.

    In the income statement, revenues are $400. As mentioned all transactions are the cash transactions. Thus, the revenues are the cash receipts from the customers.

    Therefore, cash receipts from the customers are $400.

11. k) Compute the cash payments for expenses.

    In the income statement, expenses are $250. As mentioned, all transactions are the cash transactions. Thus, the expenses are reported as cash payments for expenses.

    Therefore, cash payments for expenses are $250.

12. l) Compute the expenses for Year 2.

$\begin{array}{c}\text{ Expense}\text{ =}\text{Revenue}-\text{Net Income}\\ =\$500-\$100\\ =\$400\end{array}$

Therefore, expenses for Year 2 are $400.

1. m) Compute the beginning common stock for Year 2

   Ending common stock of Year 1 is the beginning common stock of the Year 2. Thus, the beginning common stock of Year 2 is $8,000.

2. n) Compute the ending retained earnings of Year 2.

   Year 1’s ending retained earnings $25 is the beginning retained earnings of Year 2.

   $\begin{array}{c}\text{Ending Retained Earnings =}\text{Beginning}\text{Retained Earnings}+\text{Net Income}-\text{Dividends}\\ \text{=}\$25+\text{\$100}-\text{\$50}\\ \text{=}\$75\end{array}$

   Therefore, ending retained earnings for Year 2 is $75.

3. o) Compute the cash balance as on Year 2 balance sheet.

   Cash balance for the Year 2 is $6,650 (as given in the cash flow statement of Year 2).

4. p) Compute the land balance as on Year 2 balance sheet.

   $\begin{array}{c}\text{ Land}\text{ =}\text{Total Assets}-\text{Cash balance}\\ =\$11,650-\$6,650\\ =\$5,000\end{array}$

   Therefore, land balance as on Year 2 balance sheet is $5,000.

5. q) Compute the liabilities as on Year 2 balance sheet.

   $\begin{array}{c}\text{Liabilities =}\text{Total Liabilities and Stockholders Equity}-\text{Stockholders'}\text{Equity}\\ \text{=}\text{\$11,650}-\text{\$9,175}\\ \text{=}\text{\$2,475}\end{array}$

   Therefore, liabilities amount as on Year 2 balance sheet is $2,475.

6. r) Compute the common stock as on Year 2 balance sheet.

   Ending balance of common stock in the statement of changes in stockholders equity is $9,100.  It is reported as a common stock as on balance sheet of Year 2

7. s) Compute the Ending common stock of Year 3’s statement of changes in the stockholders’ equity.

   $\begin{array}{c}\text{Ending Common Stock}\text{= }\text{Beginning Common stock}+\text{Common stock issued}\\ \text{=}\text{\$9,100}-\text{\$310}\\ \text{=}\text{\$9,410}\end{array}$

   Therefore, ending common stock for Year 3 is $9,410.

8. t) Compute the total stockholders’ equity as on Year 3 balance sheet.

   $\begin{array}{c}\text{Total Stockholders’ Equity = Ending Common Stock}\text{+ Ending Retained Earnings}\\ \text{=}\text{\$9,410}\text{+}\text{\$300}\\ \text{=}\text{\$9,710}\end{array}$

   Therefore, the total stockholders’ equity for Year 3 is $9,710.

9. u) Compute the cash balance for Year 3 balance sheet.

Cash balance for the Year 3 is $8,050 (as given in the cash flow statement).

1. v) Compute the cash receipts from customers.

   In the income statement, revenues are $800. As mentioned all transactions are the cash transactions. Thus, the revenues are the cash receipts from the customers.

   Therefore, cash receipts from the customers are $800.

2. w) Compute the cash payments for expenses.

   In the income statement, expenses are $425. As mentioned, all transactions are the cash transactions. Thus, the expenses are reported as cash payments for expenses.

   Therefore, cash payments for expenses are $425.

3. x) Compute the cash payment to reduce debt in Year 3.

   $\begin{array}{c}\text{Cash payment to reduce debt = Liabilities in Year 2 – Liabilities in Year 3}\\ \text{=}\text{\$2,475}-\text{\$840}\\ =\$1,635\end{array}$

   Therefore, $1,635 is the cash payment to reduce debt in year 3.

4. y) Compute the cash receipt from issue of common stock.

   During the Year 3, $310 additional common stock issued for cash (refer statements of changes in the shareholders’ equity of Year 3).

   Therefore, cash receipt from issue of common stock is $310.

5. z) Compute the cash payment for dividends.

   During the Year 3, $150 divided paid for cash (refer statements of changes in the shareholders’ equity of Year 3).

   Therefore, cash payment for dividend is $150.