Chapter 1,2: Financial Statements,

Accounting System

Tutorial 2
Introduction to Financial Accounting- FAC 102
Rupak Thapa & Sonal Chaudhary
06/09/2023
 Four major financial statements
1. Income Statement: Reports performance (profit) of firm during the period
Net Income=Revenue- Expenses
Revenue from sale of goods or services to customers
Expenses are the amount spent to earn revenues
2. Balance Sheet: Reports financial position ( assets, liabilities, equity) of the
firm at a particular point in time
Assets=Liabilities+ Shareholder’s equity
Assets: what company owns
Liabilities: what company owes to creditors
Shareholder’s Equity: what company owes to shareholders
3. Statement of Shareholder’s Equity: reports the changes in each of the
company’s stockholders’ equity accounts during that period.
Beginning Retained Earning+Net Income-Dividends=Ending Retained Earning
4. Statement of Cash flows: Reports actual cash inflows and outflows in
business, Operating +Investing + Financing Cash flows
Practice Questions- Preparing an Income Statement, Statement of Stockholders’ Equity,
and Balance Sheet (P1-1) AP1-1 LO1-1

Assume that you are the president of Influence Corporation. At the end of the first year (December
31) of operations, the following financial data for the company are available:

Cash $ 13,150

Receivables from customers (all considered collectible) 10,900

Inventory of merchandise (based on physical count and priced at cost) 27,000

Equipment owned, at cost less used portion 66,000

Accounts payable owed to suppliers 31,500

Salary payable (on December 31, this was owed to an employee who will be paid on January 10)
1,500

Total sales revenue 100,000

Expenses, including the cost of the merchandise sold (excluding income taxes) 68,500

Income tax expense at 30% × Pretax income; all paid during December of the current year

Common stock at the end of the current year 62,000

No dividends were declared or paid during the current year.

The beginning balances in Common Stock and Retained Earnings are

zero because it is the first year of operations.

Required: Using the financial statement exhibits in the chapter as

models and showing computations:

1.Prepare a summarized income statement for the year.

2. Prepare a statement of stockholders’ equity for the year.
3. Prepare a balance sheet at year end.

Contemporary Engineering Economics, 4 th

edition © 2007
 INFLUENCE CORPORATION
Income Statement
For the Year Ended December 31, Current Year

Total sales revenue (given) $100,000

Total expenses (given) $68500
Pretax income $31500
Income tax expense ($31,500 x 30%) $9450
Net income $22,050

Contemporary Engineering Economics, 4 th

edition © 2007
 INFLUENCE CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year

Common Stock Retained Earnings

Balance, January 1, Current year $ 0 $ 0
Common stock issuance (given) 62,000
+Net income (from req. 1) 22,050
–Dividends (given) 0
Balance, December 31, Current year $ 62,000 $ 22,050

Contemporary Engineering Economics, 4 th

edition © 2007
 INFLUENCE CORPORATION
Balance Sheet
At December 31, Current Year

Assets

Cash (given) $13150

Receivables from customers (given) 10,900

Inventory of merchandise (given) 27,000

Equipment (given) 66,000

Total assets $117,050

 INFLUENCE CORPORATION
Balance Sheet
At December 31, Current Year

Liabilities

Accounts payable (given) $31,500

Salary payable (given) 1,500

Total liabilities $ 33,000

Stockholders' Equity

Common stock (given) 62,000

Retained earnings (from req. 2) 22,050

Total stockholders' equity 84,050

Total liabilities and stockholders' equity $117,050
Comparing Income with Cash Flow (P1-3) Choice Chicken Company was
organized on January 1. At the end of the first quarter (three months) of
operations, the owner prepared a summary of its activities as shown in
transaction (a) of the following table
Computation of Summary of Transactions as Income and Cash:
a. Services performed for customers, $85,000, of which $15,000 remained
uncollected at the end of the quarter. +$85,000 +$70,000
b. Cash borrowed from the local bank, $25,000 (one-year note).
c. Small service truck purchased at the end of the quarter to be used in the
business for two years starting the next quarter: Cost, $8,000 cash.
d. Wages earned by employees, $36,000, of which one-sixth remained unpaid
at the end of the quarter.
e. Service supplies purchased for use in the business, $4,000 cash, of which
$1,000 were unused (still on hand) at the end of the quarter.
f. Other operating expenses, $31,000, of which one-half remained unpaid at
the end of the quarter.
g. Based only on these transactions, compute the following for the quarter:
Income (or loss) Cash inflow (or outflow
Transaction Income Cash Explanation

(a) +$85,000 +$70,000 All services performed increase income;

cash received during the period was:

$85,000 – $15,000 = $70,000.

(b) –0– +25,000 Cash borrowed is not income.

(c) –0– –8,000 Purchase of the truck does not represent

an expense until the truck is used (asset)

cash outflow was $8,000.

Transaction Income Cash Explanation

(d) –36,000 –30,000 All of the wages incurred reduce income,

$36,000; cash paid during the quarter was:

$36,000 x 5/6 = $30,000. The $6,000

owed will be paid on the next payroll date.

(e) –3,000 –4,000 Not all of the supplies were used; expense
is the amount used: $4,000 – $1,000 =$3,000.
Cash paid during the quarter was $4,000.

(f) –31,000 –15,500 All expenses incurred reduce income; cash

expended was: $31,000 – $15,500 = $15,500.
 Some Important Definitions:
1. Transaction
2. Going concern assumption
3. Balance sheet
4. Liabilities
5. Assets =Liabilities +Stockholders’ Equity
6. Notes payable
7. Common stock
8. Historical cost principle
9. Account
10. Dual effects
11. Retained earnings
12. Current assets
13. Separate entity assumption
14. Par value
15. Debits
16. Accounts receivable
17. Monetary unit assumption
18. Stockholders’ equity
 Some Important Definitions:

1. Transaction: An exchange between an entity and one or more external

parties to a business.
2. Going concern assumption : The concept that businesses will operate into
the foreseeable future.
3. Balance sheet : Reports assets, liabilities, and stockholders’ equity.
4. Liabilities : Measurable obligations resulting from a past transaction that are
expected to be settled in the future by transferring assets or providing
services
5. Assets = Liabilities + Stockholders’ Equity : The accounting equation.
6. Notes payable : The account that is credited when money is borrowed from a
bank.
7. Common stock :Represents the shares issued at par value.
8. Historical cost principle : The concept that assets should be recorded at the
cash equivalent value on the exchange date.
9. Account : A standardized format used to accumulate the dollar effect of
transactions on each financial statement item.
Dual effects : Every transaction has at least two effects on the accounting
equation.
Retained earnings: . Cumulative earnings of a company that are not
distributed to the owners.
Separate entity: Business transactions are accounted for separately from the
transactions of the owners.
Par value: A legal amount per share.
Accounts receivable : Amounts owed from customers
Monetary unit assumption: Accounting information should be measured and
reported in the national monetary unit without adjustment for changes in
purchasing power.
Stockholders’ equity: Financing provided by owners and by business
operations.
Current assets :Economic resources to be used or turned into cash within one
year.
 Identifying Account Titles
The following are independent situations. E2-2
a. A new company is formed and sells 100 shares of $1 par value stock for $12
per share to investors.
b. A company purchases for $18,000 cash a new delivery truck that has a list, or
sticker, price of $21,000.
c. A women’s clothing retailer orders 30 new display stands for $300 each for
future delivery.
d. A company orders and receives 10 personal computers for office use for which
it signs a note promising to pay $25,000 within three months.
e. A construction company signs a contract to build a new $500,000 warehouse
for a corporate customer. At the signing, the corporation writes a check for
$50,000 to the construction company as the initial payment for the construction
(receiving construction in progress). Answer from the standpoint of the
corporation (not the construction company).
f. A publishing firm purchases for $40,000 cash the copyright (an intangible
asset) to a manuscript for an introductory accounting text.
E2-2 A manufacturing firm declares a $100,000 cash dividend to be
distributed to stockholders next period.
h. A company purchases a piece of land for $50,000 cash. An appraiser for
the buyer values the land at $52,500.
i. A manufacturing company acquires the patent (an intangible asset) on a
new digital satellite system for television reception, paying $500,000 cash and
signing a $400,000 note payable due in one year.
j. A local company is a sole proprietorship (one owner); its owner buys a car
for $10,000 for personal use. Answer from the local company’s point of view.
k. A company purchases 100 shares of Apple Inc. common stock as an
investment for $5,000 cash.
l. A company borrows $1,000 from a local bank and signs a six-month note for
the loan.
m. A company pays $1,500 principal on its note payable (ignore interest).
Required: 1. Indicate the appropriate account titles, if any, affected in each of
the preceding events. Consider what is received and what is given. 2. At what
amount would you record the truck in (b)? The land in (h)? What measurement
principle are you applying? 3. For (c), what accounting concept did you apply?
For (j), what accounting concept did you apply?
 Received Given
(a) Cash (A)
Common stock and Additional
paid-in capital (SE)
(b) Equipment (A) [or Delivery truck] Cash (A)

(c) No exchange transaction —

(d) Equipment (A) [or Computer equipment] Notes payable (current) (L)

(e) Building (A) [or Construction in progress] Cash (A)

(f) Intangibles (A) [or Copyright] Cash (A)

(g) Retained earnings (SE) [Received a reduction in Dividends payable (L) [a promise
the owners’ claims to the company’s assets] to pay]
(h) Cash (A)
Land (A)
(i) Cash (A) and Notes payable
Intangibles (A) [or Patents]
(current) (L)
(j) —
No exchange transaction
(k) Cash (A)
Investments (A)

(l) Notes payable (current) (L)

Cash (A)
(m) Cash (A)
Notes payable (L) [Received a reduction in its
promise to pay]
Req. 2

The truck in (b) would be recorded as an asset of $18,000. The land in (h)
would be recorded as an asset of $50,000. These are applications of the
historical cost principle.

Req. 3

The agreement in (c) involves no exchange or receipt of cash, goods, or

services and thus is not a transaction. Since transaction (j) occurs between the
owner and others, there is no effect on the business because of the separate
entity assumption
 E2-4 Determining Financial Statement Effects of Several Transactions

The following events occurred for Johnson Company:

a. Received investment of cash by organizers and distributed to them 1,000
shares of $1 par value common stock with a market price of $40 per share.
b. Leased $15,000 of equipment, paying $3,000 in cash and signing a long-term
right-of-use lease for the rest owed.
c. Borrowed $10,000 cash from a bank.
d. Loaned $800 to an employee who signed a note due in six months.
e. Purchased $13,000 of land; paid $4,000 in cash and signed a note for the
balance.
Required: For each of the events (a) through (e), perform transaction analysis and
indicate the account, amount, and direction of the effect (+ for increase and − for
decrease) on the accounting equation. Check that the accounting equation
remains in balance after each transaction. Use the following headings: Event
Assets = Liabilities + Stockholders’ Equity
Event Assets = Liabilities + Shareholders Equity

a. Cash +40,000 Common Stock +1000

Additional Paid in capital
+39000

b. OPERATING LEASE Long-term lease

RIGHT-OF-USE liabilities
ASSETS +12000
+15000
CASH -3000
c. Cash +10,000 Notes Payable
+10000

d. Note Receivable +800

Cash -800

e. Land +13000 Notes Payable

Cash -4000 +9000
Thank You