Chapter 1, Problem 1.3BPR

Financial statements

Jose Loder established Bronco Consulting on August 1, 2016. The effect of each transaction and the balances after each transaction for August follow:

Instructions

1. 1. Prepare an income statement for the month ended August 31, 2016.
2. 2. Prepare a statement of owner’s equity for the month ended August 31, 2016.
3. 3. Prepare a balance sheet as of August 31, 2016.
4. 4. (Optional) Prepare a statement of cash flows for the month ending August 31, 2016.

To determine

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.

Statement of owner's’ equity:

This statement reports the changes in the owners’ equity for a particular period of time.

Balance Sheet:

Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date.

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.

To Prepare: The income statement of Company BC for the month ended August 31, 2016.

Explanation of Solution

Prepare the income statement of Company BC for the month ended August 31, 2016.

Company BC
Income Statement
For the month ended August 31, 2016
Particulars	Amount ($)	Amount ($)
Revenues
Fees Earned		$125,000
Expenses
Salaries expense	$58,000
Rent expense	$27,000
Auto expense	$15,500
Supplies expense	$6,100
Miscellaneous expense	$7,500
Total expenses		$114,100
Net income		$10,900

Table (1)

Conclusion

Hence, the net income of Company BC for the month ended August 31, 2016 is $10,900.

To determine

To Prepare: The statement of Owner's equity for Company BC for the month ended August 31, 2016.

Explanation of Solution

Prepare the statement of Owner's equity for Company BC for the month ended August 31, 2016.

Company BC
Statement of Owner's Equity
For the month ended August 31, 2016
Particulars	Amount ($)	Amount ($)
JL Capital, August 1, 2016		$0
Investment on August 1, 2016	$75,000
Net income for the year	$10,900
Less: Withdrawals	$15,000
Increase in Owner's equity		$70,900
JL Capital, August 31, 2016		$70,900

Table (2)

Conclusion

Hence, the owner's equity (JL Capital) of Company BC for the month ended August 31, 2016 is $70,900.

To determine

To Prepare: The balance sheet of Company BC for the month ended August 31, 2016.

Explanation of Solution

Prepare the balance sheet of Company BC for the month ended August 31, 2016.

Company BC
Balance Sheet
For the month ended August 31, 2016
Particulars	Amount ($)	Amount ($)
Assets
Current Assets
Cash	$38,000
Accounts receivable	$33,000
Supplies	$2,900
Total current assets		$73,900
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$3,000
Owner's equity
SF Capital	$70,900
Total liabilities and stockholders’ equity		$73,900

Table (3)

Conclusion

The balance sheet of Company BC shows asset balance of $73,900 which is same as the balance of liabilities and owner's equity.

To determine

To Prepare: The statement of cash flows for Company BC for the month ended August 31, 2016.

Explanation of Solution

Prepare the statement of cash flows for Company BC for the month ended August 31, 2016.

Company BC
Statement of Cash Flows
For the month ended August 31, 2016
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers		$92,000
Cash payments for expenses	$108,000
Payments to creditors	$6,000	(1)$114,000
Net cash flow used for operating activities		(-)  $22,000
Cash flows from investing activities		$0
Cash flows from financing activities:
Cash receipt of owner’s investment	$75,000
Less: Withdrawals	(-)  $15,000
Net cash flow from financing activities		$60,000
Cash Balance on August 31, 2016		$38,000

Table (4)

Working note:

1. (1) Cash payments for expenses and cash paid to creditors amounts are taken from the cash column shown in the question.

• $\begin{array}{c}\left(\begin{array}{l}\text{Expenses paid}\\ \text{ in cash}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{cash paid to}\\ \text{ creditors}\end{array}\right)=\left(\begin{array}{l}\text{rent expense}\text{+}\text{automobile}\\ \text{ expenses+ salaries expense }\end{array}\right)+\left(\begin{array}{l}\text{accounts}\\ \text{ payable}\end{array}\right)\\ =\left(\$27,000+\$23,000+\$58,000\right)+\left(\$6,000\right)\\ =\$114,000\end{array}$ (1)

Conclusion

The statement of cash flows for Company BC for the month ended August 31, 2016, shows cash balance of $38,000 on August 31, 2016.