MODULE 3
FINANCIAL STATEMENTS
Demonstration Problem 1
Clean-Rite Service
Clean-Rite Service began operations in March 2000. Clean-Rite Service is a sole-proprietorship. The transactions for March were recorded in the general journal and posted to the general ledger in a previous assignment. This assignment requires you to prepare a trial balance and then prepare financial statements for March 2000.
Clean-Rite Service
Trial Balance
March 31, 2000
Account nameDebitCredit
Cash $1,085
Supplies 35
Equipment 400
Truck 1,000
Notes Payable$1,750
Lisa, Capital 500
Lisa, Drawings 100
Service Revenue
Supplies Expense 80 450
$2,700$2,700
Clean-Rite Service
Income Statement
for the month ended March 31, 2000
Revenues
Service Revenue$450
Expenses
Supplies Expense$80
Total Expenses $80
Net Income$370
Clean-Rite Service
Statement of Owner’s Equity
for the month ended March 31, 2000
Lisa, Capital, March 1, 2000 0
Plus:Investments 500
Net Income 370
Less:Drawings 100 Lisa, Capital, March 31, 2000 $770
Clean-Rite Service
Balance Sheet
March 31, 2000
Assets
Cash $1,085
Supplies 35
Equipment 400
Truck 1,000
Total Assets$2,520
Liabilities
Notes Payable - Dad$1,000
Notes Payable - Fuller Trucks 750
Total Liabilities 1,750
Lisa, Capital ___770
Total Owner’s Equity_ 770
Total Liabilities and Owner’s Equity$2,520
Demonstration Problem 2
Music Stop
Music Stop began operations in April 2000. Music Stop is a sole-proprietorship. The transactions for April 2000 were recorded in the general journal and posted to the general ledger in a previous assignment. This assignment requires you to prepare a trial balance and then prepare financial statements for April 2000.
Music Stop
Trial Balance
April 30, 2000
Account NameDebitCredit
Cash$36,400
Inventory 17,000
Equipment 12,000
Accounts Payable$15,000
Note Payable 40,000
Capital Stock 10,000
Retained Earnings 0
Sales Revenue 4,500
Cost of Goods Sold 3,000
Salaries Expense 1,000
Utilities Expense 100______
$69,500$69,500
Music Stop
Income Statement
for the month ended April 30, 2000
Revenues
Sales Revenue$4,500
Expenses
Cost of Goods Sold$3,000
Salaries Expense 1,000
Utilities Expense 100
Total Expenses 4,100
Net Income$ 400
Music Stop
Statement of Retained Earnings
For the Month Ended April 30, 2000
Retained Earnings, July 1, 2000 $0
Plus:Net Income400
Less:Dividends
Retained Earnings, July 31, 2000 $ 400
Music Stop
Balance Sheet
April 30, 2000
Assets
Cash$36,400
Inventory 17,000
Equipment 12,000
Total Assets$65,400
Liabilities
Accounts Payable$15,000
Notes Payable40,000
Total Liabilities 55,000
Owners’ Equity
Capital Stock$10,000
Retained Earnings 400
Total Owners’ Equity10,400
Total Liabilities and Owners’ Equity$65,400
Practice Problem 1
East West Travels
East West Travels began operations in April 2000. East West Travel is a sole-proprietorship. The transactions for April 2000 were recorded in the general journal and posted to the general ledger in a previous assignment. This assignment requires you to prepare a trial balance and then prepare financial statements for April 2000.
East West Travels
Trial Balance
April 30, 2000
Account name DebitCredit
Cash $50,500
Accounts Receivable 650
Supplies 450
Notes Payable$10,000
Brian, Capital 40,000
Brian, Drawings 500
Service Revenue 2,450
Supplies Expense ____350______
$52,450$52,450
East West Travels
Income Statement
For the Month Ended April 30, 2000
Revenues
Service Revenue$2,450
Expenses
Supplies Expense $350
Total Expenses 350
Net Income$2,100
East West Travels
Statement of Owner’s Equity
For the Month Ended April 30, 2000
Brian, Capital, April 1, 2000 $0
Plus:Investments40,000
Net Income 2,100
Less:Drawings ____500
Brian, Capital, April 30, 2000 $41,600
East West Travels
Balance Sheet
April 30, 2000
Assets
Cash$50,500
Accounts Receivable 650
Supplies 450
Total Assets 51,600
Liabilities
Notes Payable $10,000
Total Liabilities 10,000
Owner’s Equity
Brian, Capital $41,600
Total Owner’s Equity 41,600
Total Liabilities and Owner’s Equity 51,600
Practice Problem 2
O’Grady Building Supplies
The transactions for O’Grady Building Supplies for July 2000 were recorded in the general journal and posted to the general ledger in a previous assignment. O’Grady Building Supplies is organized as a corporation. This assignment requires you to prepare a trial balance and then prepare financial statements for July 2000.
O’Grady Building Supplies
Trial Balance
July 31, 2000
Account Name Debit Credit
Cash$59,700
Inventory 9,000
Supplies 400
Accounts Payable$16,500
Capital Stock 50,000
Retained Earnings0
Sales Revenue 18,000
Cost of Goods Sold 13,500
Supplies Expense 100
Rent Expense 1,800______$84,500 $84,500
O’Grady Building Supplies
Income Statement
for the month ended July 31, 2000
Revenues
Sales Revenue$18,000
Expenses
Cost of Goods Sold$13,500
Supplies Expense 100
Rent Expense 1,800
Total Expenses 15,400
Net Income $2,600
O’Grady Building Supplies
Statement of Retained Earnings
For the Month Ended July 31,2000
Retained Earnings, July 1, 2000 $0
Plus:Net Income 2,600
Less:Dividends_____0 Retained Earnings, July 31, 2000 $2,600
O’Grady Building Supplies
Balance Sheet
July 31, 2000
Assets
Cash$59,700
Inventory 9,000
Supplies 400
Total Assets$69,100
Liabilities
Accounts Payable$16,500
Total Liabilities 16,500
Owners’ Equity
Capital Stock 50,000
Retained Earnings 2,600
Total Owners’ Equity52,600
Total Liabilities and Owners’ Equity$69,100
Homework Problem 1
Carlson Realty
On June 1, 2000, George Carlson started Carlson Realty. Carlson Realty is a sole-proprietorship. The transactions for June were recorded in the general journal and posted to the general ledger in a previous assignment . This assignment requires you to prepare a trial balance and then prepare financial statements for June 2000.
Carlson Realty
Trial Balance
June 30, 2000
Account nameDebitCredit
Cash$9,960
Supplies 385
Furniture 5,500
Accounts Payable $ 270
Notes Payable 3,000
George, Capital 8,000
George, Drawings 1,000
Service Revenue 11,000
Supplies Expense 135
Automobile Expense 1,350
Rent Expense 1,400
Utilities Expense 140
Salaries Expense2,400______
$22,270$22,270
Carlson Realty
Income Statement
For the Month Ended June 30, 2000
Revenues
Service Revenue$11,000
Expenses
Salaries Expense$2,400
Rent Expense 1,400
Automobile Expense 1,350
Utilities Expense 140
Supplies Expense 135
Total Expenses 5,425
Net Income $5,575
Carlson Realty
Statement of Owner’s Equity
For the Month Ended June 30, 2000
George, Capital, June 1, 2000 $0
Plus:Investments 8,000
Net Income 5,575
Less:Drawings __1,000
George, Capital, June 30, 2000 $12,575
Carlson Realty
Balance Sheet
June 30, 2000
Assets
Cash $9,960
Supplies385
Furniture _5,500
Total Assets 15,845
Liabilities
Accounts Payable $ 270
Notes Payable 3,000
Total Liabilities 3,270
Owner's Equity
George, Capital $12,575
Total Owner’s Equity 12,575
Total Liabilities and Owner’s Equity $15,845
Homework Problem 2
Jackie’s Floral Designs
Jackie's Floral Designs sells plants, flowers, and silk and dried arrangements. Jackie's Floral Designs is a sole-proprietorship. The transactions for January 2000 were recorded in the general journal and posted to the general ledger in a previous assignment. This assignment requires you to prepare a trial balance and then prepare financial statements for January 2000.
Jackie’s Floral Designs
Trial Balance
January 31, 2000
Account nameDebitCredit
Cash $13,300
Accounts Receivable2,500
Inventory 700
Supplies 175
Accounts Payable $4,000
Jackie, Capital 12,500
Jackie, Drawings 500
Sales Revenue 8,000
Cost of Goods Sold5,000
Wages Expense1,200
Rent Expense 800
Utilities Expense 150
Supplies Expense 175 ______
$24,500$24,500
Jackie’s Floral Designs
Income Statement
For the Month Ended January 31, 2000
Revenues
Sales Revenue$8,000
Expenses
Cost of Goods Sold$5,000
Wages Expense 1,200
Utilities Expense 150
Supplies Expense 175
Rent Expense 800
Total Expenses 7,325
Net Income$ 675
Jackie’s Floral Designs
Statement of Owner’s Equity
For the Month Ended January 31, 2000
Jackie, Capital, January 1, 2000 $0
Plus:Investments 12,500
Net Income 675
Less:Drawings____500
Jackie, Capital, January 28, 2000$12,675
Jackie’s Floral Designs
Balance Sheet
January 31, 2000
Assets
Cash$13,300
Accounts Receivable 2,500
Inventory 700
Supplies 175
Total Assets $16,675
Liabilities
Accounts Payable $ 4,000
Total Liabilities 4,000
Owner's Equity
Jackie, Capital$12,675
Total Owner’s Equity$12,675
Total Liabilities and Owner’s Equity$16,675
Homework Problem 3
The Audio Exchange
The Audio Exchange sells used audio equipment and provides repair services. The Audio Exchange is organized as a corporation. The transactions for November 2000 were recorded in the general journal and posted to the general ledger in a previous assignment. This assignment requires you to prepare a trial balance and then prepare financial statements for November 2000.
The Audio Exchange
Trial Balance
November 30, 2000
Account name Debit Credit
Cash$10,980
Accounts Receivable 2,500
Inventory 12,500
Supplies 300
Accounts Payable$ 9,000
Capital Stock 12,000
Retained Earnings 0
Dividends 1,000
Sales Revenue 4,000
Service Revenue 5,800
Cost of Goods Sold 2,500
Advertising Expense 700
Repairs Expense 120
Supplies Expense 200______
$30,800$30,800
The Audio Exchange
Income Statement
For the month ended November 30, 2000
Revenues
Sales Revenue$4,000
Service Revenue5,800
Total Revenues$9,800
Expenses
Cost of Goods Sold2,500
Advertising Expense 700
Repairs Expense 120
Supplies Expense 200
Total Expenses3,520
Net Income$6,280
The Audio Exchange
Statement of Retained Earnings
For the month ended November 30, 2000
Retained Earnings, November 1, 2000 $0
Plus:Net Income6,280
Less:Dividends _1,000
Retained Earnings, November 30, 2000 $5,280
The Audio Exchange
Balance Sheet
November 30, 2000
Assets
Cash$10,980
Accounts Receivable 2,500
Inventory 12,500
Supplies 300
Total Assets$26,280
Liabilities
Accounts Payable $9,000
Total Liabilities 9,000
Owners’ Equity
Capital Stock$12,000
Retained Earnings 5,280
Total Owners’ Equity17,280
Total Liabilities and Owners’ Equity$26,280
Homework Problem 4
Hoffman Consulting Incorporated
Hoffman Consulting Inc. started operations in October 2000. The transactions for October were recorded in the general journal and posted to the general ledger in a previous assignment. Hoffman Consulting Inc. is organized as a corporation. This assignment requires you to prepare a trial balance and then prepare financial statements for October 2000.
Hoffman Consulting Inc.
Trial Balance
October 31, 2000
Account name DebitCredit
Cash$30,870
Accounts Receivable 1,000
Supplies 265
Computer 2,000
Accounts Payable$1,000
Capital Stock25,000
Retained Earnings 0
Service Revenue10,500
Supplies Expense 135
Advertising Expense 275
Rent Expense 1,800
Utilities Expense 155______
$36,500$36,500
Hoffman Consulting Inc.
Income Statement
For the Month Ended October 31, 2000
Revenues
Service Revenue$10,500
Expenses
Advertising Expense$ 275
Utilities Expense 155
Supplies Expense 135
Rent Expense 1,800
Total Expenses 2,365
Net Income$8,135
Hoffman Consulting Inc.
Statement of Retained Earnings
for the month ended October 31, 2000
Retained Earnings, October 1, 2000 $0
Plus:Net Income 8,135
Less:Dividends _____0
Retained Earnings, October 31, 2000$8,135
Hoffman Consulting Inc.
Balance Sheet
October 31, 2000
Assets
Cash$30,870
Accounts Receivable 1,000
Supplies 265
Computer 2,000
Total Assets$34,135
Liabilities
Accounts Payable $1,000
Total Liabilities 1,000
Owner's Equity
Capital Stock $25,000
Retained Earnings 8,135
Total Owners' Equity 33,135
Total Liabilities and Owners' Equity $34,135
Homework Quiz
Financial Statements
1. The Statement of Changes in Owner's Equity includes which of the following account titles?
a. Cash
b. Owner's additional investment made during the current period
c. Accounts Payable
d. Salaries expense
2. The Statement of Retained Earnings includes which of the following account titles?
a. Cash
b. Owner's additional investment made during the current period
c. Net Income
d. Salaries expense
3. When preparing the Statement of Changes in Owner's Equity, the beginning Owner's Capital balance can be found:
a. In the expense section of the Trial Balance.
b. In the liabilities section of the Trial Balance.
c. In the General Ledger
d. In the General Journal
4. A Trial Balance ensures that:
a. No transactions have been omitted from the General Journal.
b. All transactions have been properly posted to the General Ledger.
c. Journal entries have been recorded in the proper accounts.
d. The total of all debit entries equal the total of all credit entries.
5. Which of the following account titles will NOT appear on a Balance Sheet of Problem Solvers, a Sole Proprietorship?
a. Cash
b. Accounts Payable
c. Owner, Capital
d. Retained Earnings
6. Which of the following account titles will NOT appear on the Balance Sheet of Pace Manufacturing, Inc., a Corporation?
a. Dividends
b. Inventory
c. Owner, Capital
d. Capital Stock
7. Which of the following account titles will NOT appear on the Income Statement of Realty Links, Inc., a Corporation?
a. Dividends
b. Cost of Goods Sold
c. Rental Revenue
d. Commissions Expense
8. Which of the following account titles will NOT appear on the Income Statement of Jeffrey Lyons, CPA., a Sole Proprietorship?
a. Cost of Goods Sold
b. Drawings
c. Fees Earned
d. Rent Expense
9. Which of the following account titles will ONLY appear on the Trial Balance of a Sole Proprietorship?
a. Dividends
b. Drawings
c. Capital Stock
d. Retained Earnings
10. Which of the following account titles are grouped properly with the financial statement on which they appear?
a. Statement of Owner's Equity: Dividends, Drawings; Statement of Retained Earnings: Net Income, Dividends
b. Statement of Owner's Equity: Drawings, Owner's Investment; Statement of Retained Earnings: Net Loss, Dividends
c. Statement of Owner's Equity: Dividends, Drawings; Statement of Retained Earnings: Net Loss, Capital Stock <br>
d. Statement of Owner's Equity: Drawings, Owner's Investment; Statement of Retained Earnings: Net Loss, Capital Stock <br>
11. Which of the following account titles are grouped properly with the financial statement on which they appear?
a. Statement of Owner's Equity: Owner's Capital, Drawings; Statement of Retained Earnings: Dividends, Beg. Retained Earnings
b. Statement of Owner's Equity: Drawings, Owner's Capital; Statement of Retained Earnings: Net Income, Dividends Payable
c. Statement of Owner's Equity: Dividends, Drawings; Statement of Retained Earnings: Net Income, Capital Stock
d. Statement of Owner's Equity: Drawings, Owner's Investment; Statement of Retained Earnings: Net Income, Dividends Payable
12. Bill Phelan, a sole proprietor, incurred the following transactions during the month of November 2001:
- Paid rent expense of $12,000.
- Collected $15,000 of existing Accounts Receivable.
- Billed customers $20,000 for services rendered.
The Cash balance at the beginning of November was $11,500. What amount is included in the Cash account on Bill Phelan's Trial Balance dated November 30, 2001?
a. $(500)
b. $14,500
c. $31,500
d. $34,500
13. Bill Phelan, a sole proprietor, incurred the following transactions during the month of November 2001:
- Paid rent expense of $12,000.
- Collected $15,000 of existing Accounts Receivable.
- Billed customers $20,000 for services rendered.
The November 1st Accounts Receivable balance was $25,000. What amount is included in the Accounts Receivable account on Bill Phelan's Trial Balance dated November 30, 2001?
a. $10,000
b. $15,000
c. $30,000
d. $45,000
14. Compute the amount to be reported for Capital Stock based upon the December 31, 2001 Trial Balance of Colvern Services, Inc., a corporation, which is summarized below.
Accounts Payable / 650Notes Payable / 14,000
Accounts Receivable / 1,600
Rent Expense / 3,000
Building / 30,000
Retained Earnings / 2,252
Capital Stock / ??
Sales Revenue / 57,500
Cash / 2,320
Supplies / 1,112
Cost of Goods Sold / 35, 938
Utilities Expense / 1,032
Equipment / 9,400
Wages Expense / 4,000
Inventory / 6,000
a. $10,000 credit
b. $20,000 credit
c. $30,000 credit
d. $40,000 credit
15. The December 31, 2001 Trial Balance of Colvern Services, Inc., a corporation, is summarized below.
Accounts Payable / 650Notes Payable / 14,000
Accounts Receivable / 1,600
Rent Expense / 3,000
Building / 30,000
Retained Earnings / 2,252
Capital Stock / 20,000
Sales Revenue / 57,500
Cash / 2,320
Supplies / 1,112
Cost of Goods Sold / 35,938
Utilities Expense / 1,032
Equipment / 9,400
Wages Expense / 4,000
Inventory / 6,000
What are the Total Assets to be reported on Colvern's Balance Sheet dated December 31, 2001?
a. $41,032
b. $49,320
c. $50,432
d. $86,370
16. Selected accounts from the Trial Balance of Schreck Web Services, a sole proprietorship, are shown below:
Fees Earned / 30,000Wages Expense / 3,000
Insurance Expense / 2,000
Equipment / 8,000
Supplies / 1,000
Supplies Expenses / 3,000
Net income for the period is:
a. $24,000
b. $20,000
c. $25,000
d. $22,000
17. The December 31, 2001 Trial Balance of Colvern Services, Inc., a corporation, is summarized below.
Accounts Payable / 650Notes Payable / 14,000
Accounts Receivable / 1,600
Rent Expense / 3,000
Building / 30,000
Retained Earnings / 2,252
Capital Stock / 20,000
Sales Revenue / 57,500
Cash / 2,320
Supplies / 1,112
Cost of Goods Sold / 35,938
Utilities Expense / 1,032
Equipment / 9,400
Wages Expense / 4,000
Inventory / 6,000
What is the Net Income to be reported on Colvern's Income Statement for the year ended December 31, 2001?
a. $17,562
b. $14,562
c. $13,530
d. $12,418
18. Bob and Ray organized BR, Incorporated, a corporation for which they are the only stockholders. After investing $100,000 each, they are issued all of the shares of the corporation. Net Income/(Loss) and Dividends for the first two years of operations are:
Net Income / DividendsYear 1 / $50,000 / $4,000
Year 2 / $(45,000) / $0
The Retained Earnings balance at the end of Year 2 is:
a. $ 1,000
b. $ 4,000
c. $ 5,000
d. $ 46,000
19. Carriage Corporation's Retained Earnings balance was $46,800 on January 1, 2001. Net income for 2001 was $26,480. Retained Earnings had a credit balance of $21,000 after Net Income and Dividends were posted on December 31, 2001. Additional stock of $13,000 was issued during the year. Dividends paid during 2001 were:
a. $38,800
b. $52,280
c. $60,280
d. $73,280
20. Carriage Corporation's Retained Earnings and Capital Stock balances were $46,800 and $25,000, respectively, on January 1, 2001. Net income for 2001 was $26,480. Retained Earnings had a credit balance of $21,000 after Net Income and Dividends were posted on December 31, 2001. Additional stock of $13,000 was issued during the year. Total Stockholders' Equity at December 31, 2001 was:
a. $38,000
b. $46,000
c. $52,280
d. $59,000
21.Which of the following accounts have a normal debit balance?
a.Revenue
b.Capital Stock
c.Accounts Receivable
d.Retained Earnings
22.Which of the following accounts have a normal credit balance?
a.Accounts Receivable
b.Cash
c.Capital Stock
d.Dividends
23.The list of all the accounts with their ending balances is called the:
a.Trial Balance
b.Income Statement
c.Statement of Retained Earnings
d.Balance Sheet
24.Assume that a company had a beginning balance in Retained earnings was $1,200. The company earned revenues of $3,600 and incurred expenses of $1,600. The ending balance in Retained Earnings was:
a.2,000
b.3,200
c.1,200
d.6,400
25.Which of the following statements shows the assets, liabilities and owners' equity accounts?
a.Trial Balance
b.Income Statement
c.Statement of Retained Earnings
d.Balance Sheet
26.The statement of changes in owner's equity for a sole-proprietorship shows the beginning and ending balances in:
a.Retained Earnings
b.Capital Stock
c.Owner, Capital
d.Drawings
27.For a sole-proprietorship, which of the following is subtracted from the beginning owner's equity to calculate the ending owner's equity?
a.Net Income
b.Dividends
c.Owner, Capital
d.Drawings
28.For a corporation, which of the following is subtracted from the beginning owner's equity to calculate the ending owner's equity?
a.Net Income
b.Dividends
c.Owner, Capital
d.Drawings
29.Which of the following statements describes the relationship between the different types of accounts on the balance sheet?
a.Assets = Liabilities + Owner's Equity
b.Assets = Liabilities-Owner's Equity
c.Assets + Liabilities = Owner's Equity
d.Assets + Owner's Equity = Liabilities
30.Assume that the beginning balances in the Capital Stock and Retained earnings of a company were $10,000 and $1,200 respectively. The company paid dividends of $1,000 for the period. Also the company earned revenues of $3,600 and incurred expenses of $1,600. The ending balance in the Capital Stock and Retained Earnings accounts were:
a.$10,000; $2,200
b.$11,000; $1,200
c.$9,000; $3,200
d.$10,000; $1,200
MODULE 3
REVENUE AND EXPENSE RECOGNITION
Demonstration Problem 1
Music Stop
Transactions for June 2000
This example discusses revenue and expense recognition for June 2000 for Music Stop, a music store selling CDs and tapes. This problem shows whether revenue, expenses, cash inflows or cash outflows result from these events using the accrual method.
For each transaction, the appropriate answer(s) are shown based on the following list.
A. Cash was received B. Cash was paid C. Revenue was earned D. Expense was incurred
E. None of the above
1. On June 1, the company signed a two year note for $24,000. (A)