Chapter 1, Problem 1.5BPR

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:

1. A. A Beverly Zahn invested additional cash in exchange for common stock with a deposit of $21,000 in the business bank account.
2. 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.
3. C. Paid rent for the month, $4,000.
4. D. Charged customers for dry cleaning revenue on account $72,000.
5. E. Paid creditors on account $20,000.
6. F. Purchased supplies on account, $8,000.
7. G. Received cash from customers for dry cleaning revenue, $38,000.
8. H. Received cash from customers on account. $77,000.
9. I. Received monthly invoice for dry cleaning expense for November (to be paid on December 10), $29,450.
10. J. Paid the following: wages expense, $24,000; truck expense, $2,100; utilities expense, $ 1,800; miscellaneous expense, $1,300.
11. K. Determined that the cost of supplies on hand was $11300; therefore, the cost of supplies used during the month was $7,200.
12. L. Paid dividends, $5,000

Instructions

1. 1. Determine the amount of retained earnings as of November 1.
2. 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. 3. Prepare an income statement for November, a retained earnings statement for November, and a balance sheet as of November 30.
4. 4. (Optional) Prepare a statement of cash flows for November.

To determine

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.

$\begin{array}{c}\text{Assets }=\text{Liabilities}+\text{Owner's Equity}\\ \left(\begin{array}{l}\text{Cash+Accounts Receivable}\\ \text{+Supplies+Land}\end{array}\right)\text{= Liabilities}+\left[\text{Common Stock +Retained earnings}\right]\\ \left(\begin{array}{l}\text{\$39,000}+\text{\$80,000}+\\ \text{\$11,000}+\text{\$50,000}\end{array}\right)\text{= \$31,500 + (\$50,000+Retained earnings})\\ \text{\$180,000 }=\text{\$31,500 + (\$50,000 + Retained earnings})\\ \text{\$180,000}-\text{\$31,500 = \$50,000 + Retained earnings}\\ \text{148,500 = \$50,000 + Retained earnings}\\ \text{Retained earnings}=\$148,500-\text{\$50,000}\\ =\text{\$98,500}\end{array}$

The retained earnings, for BD Cleaners as on November 1, 2018 are $98,500.

To determine

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)

To determine

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.

To determine

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.

$\begin{array}{c}\begin{array}{l}\text{Expenses paid for}\\ \text{using cash}\end{array}\}\text{ = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Wage}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Rent}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Truck}\\ \text{Expense}\end{array}\right)+\\ \left(\begin{array}{l}\text{Utilites}\\ \text{Expense}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Miscellaneous}\\ \text{Expense}\end{array}\right)\end{array}\right]\\ =\$24,000+\$4,000+\$2,100+\$1,800+\$1,300\\ =\$33,200\end{array}$ (1)