Concept explainers
Transactions; financial statements
Bev’s Dry Cleaners is owned and operated by Beverly Zahn. A building and equipment are currently being rented, pending expansion to new facilities. The actual work of dry cleaning is done by another company at wholesale rates. The assets, liabilities, and common Mock of the business on November 1, 2018, are as follows: Ca.sh, $39,000. Accounts Receivable, $80,000; Supplies, $11,000; Land, $50,000; Accounts Payable, $31,500; Common Stock, $50,000. Business transactions during November are summarized as follows:
- A. A Beverly Zahn invested additional cash in exchange for common stock with a deposit of $21,000 in the business bank account.
- B. B Purchased land adjacent to land currently owned by Bev’s Dry Cleaners to use in the future as a parking lot, paying cash of $35,000.
- C. Paid rent for the month, $4,000.
- D. Charged customers for dry cleaning revenue on account $72,000.
- E. Paid creditors on account $20,000.
- F. Purchased supplies on account, $8,000.
- G. Received cash from customers for dry cleaning revenue, $38,000.
- H. Received cash from customers on account. $77,000.
- I. Received monthly invoice for dry cleaning expense for November (to be paid on December 10), $29,450.
- J. Paid the following: wages expense, $24,000; truck expense, $2,100; utilities expense, $ 1,800; miscellaneous expense, $1,300.
- K. Determined that the cost of supplies on hand was $11300; therefore, the cost of supplies used during the month was $7,200.
- L. Paid dividends, $5,000
Instructions
- 1. Determine the amount of retained earnings as of November 1.
- 2. Slate the assets, liabilities, and stockholders’ equity as of November 1 in equation form similar to that shown in this chapter. In tabular form below the equation, indicate increases and decreases resulting from each transaction and the new balances after each transaction.
- 3. Prepare an income statement for November, a retained earnings statement for November, and a
balance sheet as of November 30. - 4. (Optional) Prepare a statement of cash flows for November.
a)
Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:
Assets = Liabilities + Shareholders Equity
To Determine: The retained earnings for BD Cleaners as on November 1, 2018.
Explanation of Solution
Calculate the retained earnings for BD Cleaners as on November 1, 2018.
The retained earnings, for BD Cleaners as on November 1, 2018 are $98,500.
b)
To Indicate: The effect of each given transaction of BD Cleaners on the accounting equation.
Explanation of Solution
Business transaction: Business transaction is a record of any economic activity, resulting in the change in the value of the assets, the liabilities, and the Shareholder’s equities, of a business. Business transaction is also referred to as financial transaction.
Indicate the effect of the given transactions of BD Cleaners.
(Figure – 1)
c)
To Prepare: The financial statements for BD Cleaners for the month ended November 30, 2018.
Explanation of Solution
Financial statements: Financial statements refer to those statements, which are prepared by the Company according to particular formats in accounting to show its financial position.
Financial statements include the following statements:
Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.
Prepare the income statement of BD Cleaners for the month ended November 30, 2018.
BD Cleaners | ||
Income Statement | ||
For the month ended November 30 , 2018 | ||
Particulars | Amount ($) | Amount ($) |
Revenues | ||
Dry cleaning revenue | $110,000 | |
Expenses | ||
Dry Cleaning expense | $29,450 | |
Wages expense | $24,000 | |
Supplies expense | $7,200 | |
Rent expense | $4,000 | |
Truck expense | $2,100 | |
Utilities expense | $1,800 | |
Miscellaneous expense | $1,300 | |
Total expenses | $69,850 | |
Net income | $40,150 |
Table (1)
Hence, the net income of BD Cleaners for the month ended November 30, 2018 is $40,150.
Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.
Prepare the statement of Retained earnings for BD Cleaners for the month ended November 30, 2018.
BD Cleaners | ||
Statement of Retained Earnings | ||
For the month ended November 30 , 2018 | ||
Particulars | Amount ($) | Amount ($) |
Retained earnings, November 1, 2018 | $98,500 | |
Net income for the month | $40,150 | |
Deduct - Dividends | $5,000 | |
Increase in Retained earnings | $35,150 | |
Retained earnings, November 30, 2018 | $133,650 |
Table (2)
Hence, the retained earnings of BD Cleaners for the month ended November 30, 2018 are $133,650.
Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.
Prepare the balance sheet of BD Cleaners for the month ended November 30, 2018.
BD Cleaners | ||
Balance Sheet | ||
November 30 , 2018 | ||
Particulars | Amount ($) | Amount ($) |
Assets | ||
Current Assets | ||
Cash | $81,800 | |
Accounts receivable | $75,000 | |
Supplies | $11,800 | |
Land | $85,000 | |
Total current assets | $253,600 | |
Liabilities and Stockholders’ Equity | ||
Liabilities | ||
Accounts payable | $48,950 | |
Owner's equity | ||
Common Stock | $71,000 | |
Retained earnings | $133,650 | |
Total stockholders’ equity | 204,650 | |
Total liabilities and stockholders’ equity | $253,600 |
Table (3)
The balance sheet of BD Cleaners shows asset balance of $253,600 which is same as the balance of liabilities and owner's equity.
d)
To Prepare: The statement of cash flow for BD Cleaners for the month ended November 30, 2018.
Answer to Problem 1.5BPR
Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.
Prepare the statement of cash flows for BD Cleaners for the month ended November 30, 2018.
DD Cleaners | ||
Statement of Cash Flows | ||
For the month ended November 30, 2018 | ||
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Cash receipts from customers | $115,000 | |
Cash payments for expenses (1) | $33,200 | |
Payments to creditors | $20,000 | $53,200 |
Net cash flow used for operating activities | $61,800 | |
Cash flows from investing activities: | ||
Cash payment for purchase of land | (-) $35,000 | |
Cash flows from financing activities: | ||
Cash receipt of owner’s investment | $21,000 | |
Deduct - Withdrawals | (-) $5,000 | |
Net cash flow from financing activities | $16,000 | |
Net Increase in cash during November | $42,800 | |
Cash Balance on November 1, 2019 | $39,000 | |
Cash Balance on November 30 , 2019 | $81,800 |
Table (4)
The statement of cash flows for BD Cleaners for the month ended November 30, 2018, shows cash balance of $81,800 on November 30, 2018
Explanation of Solution
Working Note:
Calculate the expenses made through cash payments.
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