Intro to Financial Statements

d.  The board of directors is internal management.  All others are external.
Investors and stockholders are the same thing. 

c.  The audit report is provided by an independent certified public accounting firm after examining accounts and determining if the financial statements are materially stated in accordance with GAAP.  Internal auditors are accountants that work for the company.

b.  The accounting equation has to stay in balance –  Assets = Liabilities + O. Eq.
If assets decrease and liabilities do not change, owner’s equity has to decrease also.
When common stock does not change, the decrease must be to retained earnings.  When dividends are not paid, a decrease comes from a loss.  A loss occurs when revenues are less than expenses.  (c.) will increase retained earnings because it is a profit.  (d) will not change total assets; one asset is traded for another.

a.  Providing services is a revenue and the customer owes which is a receivable, increasing assets.  Revenues increasing will increase owner’s equity, not decrease.  This transactions does not impact liabilities or expenses.

c.  Revenues less expenses = profits of $2,000.  Profits increase retained earnings, an owner’s equity account.  Assets will increase by 7,500 less 3,000.  Liabilities do not change. 

b.  Assets must = Liabilities + Owner’s Equity.    

$3,000 + $10,000   =  $1,300 + $2,500 + ? retained earnings
       Retained earnings must be $9,200

First, go through each transaction and identify which transactions impact revenues, expenses, assets, and liabilities.  Assets, liabilities, and owner’s equity will be reported on the balance sheet.  Revenues and expenses during this period will be reported on the income statement.

a.  purchase snacks and drinks on account for $2,300
This is acquiring an asset (inventory) in exchange for a liability (A/P) 
This is not a revenue or expense

b.  pay $2,500 for snacks and drinks 
This is exchanging one asset (cash) for another (inventory)
This is not revenue or expense

c.  pay $600 to the city for the use of the snack shack during this period
This is paying for a service that was provided to you.  The city gave
you the right to use the snack shack – This is rent expense

d.  pay yourself $1,500 in wages to work the snack shack during this period
This is paying for a service that was provided to the company.
The employee (you) worked to provide the service – This is an expense

e.  pay $166 for menu boards and racks to hold the drinks and snacks
This is exchanging one asset (cash) for another asset (furniture/fixtures)
This is not a revenue or an expense.

f.   pay $175 for ice to keep the drinks cold
This is exchanging one asset (cash) for another asset (ice – supplies) 
When the asset is used up, it is an expense.  This is an expense since the ice is used up very shortly after purchase.
 
g.  received $3,000 in exchange for ownership
This is receiving an asset (cash) in exchange for giving owner’s equity (common stock)                 

h.  sell $4,600 in drinks and $3,340 in snacks for cash during the summer that cost a total of $2,100
Selling drinks and snacks is providing a service.  This is a revenue
Giving up the snacks to the customers is using an asset to provide the service and the cost of the asset used is an expense (cost of goods sold)

i.  borrowed $1,000 from your parents to make sure you didn’t run out of cash
This is receiving an asset (cash) in exchange for a liability (notes payable)
This is not a revenue or expense. 

Income Statement:

          Sales                                  $7,940        h.
       – Cost of goods sold          ($2,100)      h.
       =Gross Profit                       $5,840
       – Operating expenses:
                 Supplies expense      ($175)       f.
                 Wage expense        ($1,500)      d.
                 Rent expense          ($   600)      c.

       Operating Income              $3,565

Balance Sheet:

Assets:                                                           Liabilities:

Cash                                     6,999               Accounts Payable             2,300

Inventory                            2,700
                                                                           Notes Payable                1,000
P/P/E:
  Furniture & Fixtures          166              Total Liabilities                  3,300

                                                                       Owner’s Equity:

Total Assets                          9,865             Common Stock                    3,000
                                                                        Retained Earnings              3,565
                                                                        Total Owner’s Equity         6,565

                                                                        Total Liabilities & O.Eq.    9,865

Cash:  -2,500 – 600 -1,500 -166 -175 +3,000 +7,940 + 1,000
Inventory:  2,300 + 2,500 – 2,100

Cash Flow Statement:

            Cash collected from customers                                  7,940
            Cash paid for inventory/to supplies                        (2,500)
            Cash paid for rent                                                        (   600)
            Cash paid for wages                                                    (1,500)
            Cash paid for supplies                                                 (   175)
                        Total cash from operating activities               3,165

            Cash paid for furniture & fixtures                              (  166)
                        Total cash used for investing activities         (  166)

            Cash from borrowings                                                   1,000
            Cash from issuing stock                                                3,000
                        Total cash from financing activities               4,000
                                                                                                        ____
            Total change in cash                                                      6,999

Refer to the explanation in problem 13.  Only those that result in a revenue or expense will change retained earnings, which is owner’s equity.  Revenues increase owner’s equity.  Expenses decrease owner’s equity.   Transaction (g) which increases common stock increases owner’s equity.  

            a.  no affect
            b.  no affect
            c.  expense – decreases
            d.  expense – decreases
            e.  no affect
            f.  expense – decreases
            g. increase to common stock
            h. increase – revenues are greater than the expense 
            i.  no affect