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46) List the steps, in the correct order, that are used when analyzing transactions.
1.5 Learning Objective 1-5
1) Financial statements are business documents used to communicate information needed to make
business decisions.
2) Which of the following statements best defines financial statements?
A) Financial statements are the information systems that record monetary and nonmonetary business
transactions.
B) Financial statements are the verbal statements made to business news organizations by chief financial
officers.
C) Financial statements are business documents that report on a business in monetary terms, providing
information to help users make informed business decisions.
D) Financial statements are plans and forecasts for future time periods based on information from past
financial periods.
Answer: C
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3) Which of the following is the correct order of preparation of financial statements?
A) Income statement → statement of retained earnings → balance sheet → statement of cash flows
B) Statement of retained earnings → balance sheet → income statement → statement of cash flows
C) Balance sheet → statement of retained earnings → income statement → statement of cash flows
D) Balance sheet → income statement → statement of retained earnings → statement of cash flows
4) Prepare an income statement and a statement of retained earnings for the month of May. Also, prepare
a balance sheet as of May 31, 2019, for McGuire Corporation. The financial transactions of McGuire
Corporation for the month of May, their first month of operations, are as follows:
• On May 1, 2019, McGuire Corporation issued common stock in exchange for $20,000 cash from a
stockholder, Deborah Merchant.
• On May 3, the corporation borrowed $5,000 from a creditor and executed a note payable with the
principal and interest to be due in one year.
• On May 7, the corporation purchased $15,000 of equipment for cash.
• On May 8, McGuire Corporation rendered service to a client and received $3,000 in cash.
• On May 12, the corporation incurred a repair expense of $1,800 and promised to pay the repair
contractor the following month.
• On May 18, the corporation rendered service to a new client in the amount of $8,000 on account, as the
client promised to pay the following month.
• At the end of May, McGuire Corporation distributed cash dividends of $1,500.
Answer:
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Copyright © 2018 Pearson Education, Inc.
McGuire Corporation
Statement of Retained Earnings
Month Ended May 31, 2019
Retained Earnings, May 1, 2019 $0
Net Income for the month 9,200
9,200
Dividends (1,500)
Retained Earnings, May 31, 2019 $7,700
McGuire Corporation
Balance Sheet
May 31, 2019
Assets Liabilities
Cash $11,500 Accounts Payable $1,800
Accounts Receivable 8,000 Notes Payable 5,000
Equipment 15,000 Total Liabilities 6,800
Stockholders‘ Equity
Common Stock 20,000
Retained Earnings 7,700
_______ Total Stockholders’ Equity 27,700
Total Assets $34,500 Total Liabilities and Stockholders’ Equity $34,500
Note:
Calculation of cash balance, May 31, 2019:
Common stock issued $20,000
Borrowing from creditor 5,000
Service fees received 3,000
Receipts 28,000
Less payments:
Purchase of equipment (15,000)
Dividends (1,500)
Cash balance, May 31, 2019 $11,500
Diff: 3
LO: 1-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Do You Prepare Financial Statements? (H1)
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5) Prepare an income statement and a statement of retained earnings for the month of June. Also, prepare
a balance sheet at June 30. The transactions of Modern Designer Corporation for the first month of their
operations are as follows:
• On June 1, 2019, Modern Designer Corporation received $25,000 cash from its stockholders and gave
common stock to the stockholders.
• The company rendered services to three clients on account with total revenues earned of $9,000.
• It then incurred an advertising expense on four different web sites and promised to pay a total of
$1,200 at a later date.
• On June 13, Modern Designer purchased $1,000 worth of office supplies for cash. (The supplies are
not used by June 30.)
• On June 22, it received $2,000 on account from a client and deposited it into the business account.
• On June 23, it incurred $1,300 for a legal expense and paid cash.
• On June 30, Modern Designer made a payment of $500 to one of the web sites that it owed for
advertising provided earlier in the month.
• No dividends were paid during the month.
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Copyright © 2018 Pearson Education, Inc.
Modern Designer Corporation
Balance Sheet
June 30, 2019
Assets Liabilities
Cash $24,200 Accounts Payable $ 700
Account Receivable 7,000
Office Supplies 1,000
Stockholders‘ Equity
Common Stock 25,000
Retained Earnings 6,500
______ Total Stockholders‘ Equity 31,500
Total Assets $32,200 Total Liabilities and Stockholders’ Equity $32,200
Note:
Calculation of cash balance, June 30, 2019
Common stock issued $25,000
Service fees received 2,000
Receipts 27,000
Less payments:
Legal expense (1,300)
Office supplies (1,000)
Advertising expenses (500)
Cash balance, June 30, 2019 $24,200
Diff: 3
LO: 1-5
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Do You Prepare Financial Statements? (H1)
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6) List the four financial statements and briefly explain how each is prepared.
Financial statement
How it is prepared
1.
2.
3.
4.
Answer:
Financial statement
How it is prepared
1. Income statement
Revenues –Expenses = Net Income or
Net Loss
2. Statement of retained earnings
Retained Earnings, Beginning
+Net income for the period
or – Net Loss for the period
-Dividends for the period
=Retained Earnings, Ending
3. Balance sheet
Assets = Liabilities + Stockholders‘
Equity
4. Statement of cash flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
7) List the four financial statements and describe the information provided by each.
Financial statement
Information provided
1.
2.
3.
4.
Answer:
Financial statement
Information provided
1. Income statement
Profitability for a particular period of
time
2. Statement of retained earnings
How much of the earnings were kept
and reinvested in the company
3. Balance Sheet
Economic resources the company has
(assets); debts the company owes
(liabilities); elements of stockholders’
equity
4. Statement of cash flows
Cash receipts and cash payments for a
period of time
8) The income statement is also called the statement of financial position.
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9) The income statement is also called the statement of earnings.
10) Which of the following statements is true of an income statement?
A) There is net income when total expenses are greater than total revenues.
B) There is a net loss when total expenses are less than total revenue.
C) There is a net loss when total expenses are greater than total liabilities.
D) There is net income when total revenues are greater than total expenses.
11) Which of the following financial statements reports expenses in decreasing order of their amounts, by
stating the largest expense first?
A) Statement of cash flows
B) Income statement
C) Statement of retained earnings
D) Balance sheet
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12) Regent Plumbing Corporation provides plumbing services. Selected transactions of Regent Plumbing
Corporation are described as follows:
a) Received $8,000 cash and issued common stock to Sharon Regent.
b) Paid $5,000 cash for equipment to be used for plumbing repairs.
c) Borrowed $11,000 from a local bank and deposited the money in the checking account.
d) Paid $900 rent for the year.
e) Paid $200 cash for plumbing supplies to be used next year.
f) Completed a plumbing repair project for a local lawyer and received $3,000 cash.
Calculate the net income. Assume plumbing supplies of $200 are left at the end of the accounting period.
A) $700
B) $2,800
C) $3,000
D) $2,100
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13) Following is a list of account balances of Lincoln Lawn Services as of December 31, after the first year
of operations.
Accounts Receivable
$6,000
Accounts Payable
5,000
Salaries Expense
7,000
Repairs Expense
900
Truck
11,000
Equipment
12,000
Notes Payable
26,100
Cash
20,000
Supplies Expense
200
Service Revenue
32,000
Gasoline Expense
7,200
Salaries Payable
1,200
Calculate the net income.
A) $16,700
B) $31,100
C) $17,900
D) $49,000