January 26 February 1 2016 FINANCIAL STATEMENTS AND ANALYZING TRANSACTIONS Financial statements the end product of financial accounting annual report or 10 K Income Statement Statement of Retained earnings or more comprehensive Statement of Shareholders Equity Balance Sheet Statement of Cash Flows Other elements of the 10 K Notes to the statementso used to be called footnotes has a lot of information that provides additional details descriptions and some required disclosures Auditor s reporto independent accounting firm has to have looked at the statements prepared by the company and say if they fairly present what the company has told us happened Check the companies system to make sure that it looks good and avoids problems and they have followed the rules based on what they see in the statement Management discussion and analysis MD A o spin managements opportunity to talk about their point of view Example 1 Financial Statements A company reported the following accounts in alphabetical order with their balances as of December 31 20X1 Accounts payable Accounts receivable Advertising expense Capital Stock Cash Land 170 325 119 950 2 400 283 Required 1 Determine the following a net income for the year 20X1 Company name Income statement Notes payable Other expenses Property and equipment Retained earnings Revenue Wages expense 612 19 500 1 776 875 250 January 26 February 1 2016 For year ended 12 31 20X1 Revenue Expenses Advertising expense Wages expense Other Expense Total Expense Net Income 875 388 119 250 19 388 487 b total assets at December 31 20X1 balance sheet 3508 Company Name Balance sheet 12 31 20X1 Assets Cash AR Land P E Total Assets 2400 325 283 500 3508 Liabilities and Stockholders Equity AP 170 NP 612 Total Liability CS 782 950 RE Total SE Balance L SE 1776 2726 3508 c total liabilities at December 31 20X1 balance sheet 782 d total equity at December 31 20X1 balance sheet 2726 2 Assume the company began 20X1 with a balance in Retained earnings of 1 500 How much did the company distribute to the owners as dividends during 20X1 Why are dividends not included on the company s income statement Company Name Statement of Retained Earnings For Yr ended 12 31 X1 Beg blance RE 1 1 X1 Net Income Dividends 1500 487 solve for 211 Ending balance RE 12 31 X1 1776 Dividends are not included on an income statement because the income statement shows revenue and expenses Where does a company get the information about accounts and their balances in order to prepare financial statements January 26 February 1 2016 Transaction o financial event that has an impact on a company and can be recorded in dollars The accounting equation o AKA the balance sheet equation o Assets Liabilities stockholders equity OR assets liability common stock retained earnings Every transaction must maintain the equality of the accounting or balance sheet equation must affect at least two accounts in order to keep the equation in balance Example 2 Transactions and the accounting equation For each of the following independent events determine the effect on the accounting equation Transaction Assets a owners invested cash in the business Cash UP b company borrowed cash from bank Cash UP c company paid cash to purchase equipment d company purchased equipment by signing a note payable at the bank company completed job for customer and received cash REVENUE UP company paid employee wages for current month EXPENSES UP Cash DOWN Equity UP Equity UP e f Cash UP Cash DOWN Liabilities Stockholders equity Common Stock UP Notes Payable UP Notes Payable UP Retained Earnings UP Retained Earnings DOWN WHEN REVENUE GOES UP THE RETAINED EARNINGS GOES UP BY THAT AMOUNT Differences between expenses and payables every time we record something our account has to stay balanced so we affect two spots every time PAYABLE means we owe money often we have an EXPENSE because of a payable January 26 February 1 2016 Example 3 Rex Carswell Automotive Company Rex Carswell has always enjoyed working on cars After working for several years in the repair shop of a local car dealer Rex decided to open his own car repair shop The following transactions relate to the month of September 2015 company s first month of operations a b c d e f g h i j k Rex invested personal funds in the amount of 12 000 in exchange for company stock Rex borrowed 8 000 by signing a note payable at the Aggie National Bank Paid 450 to rent a garage and parking area for use as a shop for the current month Purchased tools for use in the shop cost of the tools was 3 600 paid 600 cash and promised to pay the balance in 30 days Paid 62 to advertise in the local newspaper during the current month Completed several repair jobs and received cash from customers 910 Completed a large repair job and billed the customer 1 000 customer promised to pay 25 of amount within 10 days Signed a contract to complete maintenance work on the delivery van of a local florist for 3 months beginning next month for 100 per month received the full 300 in cash Paid 275 in wages to part time helper Dakota Charger Received utility bill for the current month 64 amount is due and will be paid by the 10th day of the following month Rex Carswell Company paid a dividend of 500 to the sole stockholder Rex Carswell Required a Using the transactions grid at the end of these notes record the transactions for Rex Carswell Automotive Company showing the effect of each on the accounting equation b Use the information from the transaction grid to prepare an income statement and statement of Retained earnings for the month of September and a balance sheet as of September 30 2015 c Explain the interrelationships among the financial statements Example 4 Retained Earnings compared to Total Stockholders Equity Lane Company has been in business for five years As of December 31 2012 Lane had assets of 75 000 and liabilities of 25 500 After a successful year of business in 2013 the company s assets had increased by 13 500 and liabilities had increased by 6 900 A new investment of 3 600 was made January 26 February 1 2016 into the business during 2013 and a dividend of 1 500 was paid to the owners Based on this information determine Lane Company s net income for the year 2013 We have a statement of retained earnings income that they kept with the format Beginning balance RE Net income Dividends if we pay out a dividend we aren t keeping the money we are paying out to owners End balance RE 4 ANSWER Net income changes the