January 26/February 1, 2016FINANCIAL STATEMENTS AND ANALYZING TRANSACTIONSFinancial statements – the end product of financial accounting (annual report or 10-K)- Income Statement- Statement of Retained earnings (or more comprehensiveStatement of Shareholders’ Equity)- Balance Sheet- Statement of Cash FlowsOther elements of the 10-K- Notes to the statements- o used to be called footnotes, has a lot of information that provides additional details, descriptions and some required disclosures- Auditor’s report- o 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 viewExample #1 Financial StatementsA company reported the following accounts (in alphabetical order) with their balances as of December 31, 20X1. Accounts payable $ 170Accounts receivable 325Advertising expense 119Capital Stock 950Cash 2,400Land 283Notes payable 612Other expenses 19Property and equipment 500Retained earnings 1,776Revenue 875Wages expense 250Required:1. Determine the following:a. net income for the year 20X1Company nameIncome statementJanuary 26/February 1, 2016For year ended 12/31/20X1Revenue 875Expenses: -388Advertising expense 119Wages expense 250Other Expense 19__Total Expense 388 ______Net Income 487b. total assets at December 31, 20X1 (balance sheet) =3508Company NameBalance sheet12/31/20X1Assets Liabilities and Stockholders’ EquityCash 2400 AP 170AR 325 NP 612Land 283 Total Liability 782P&E _500___Total Assets 3508 CS 950RE 1776Total SE _+2726_Balance L&SE 3508c. total liabilities at December 31, 20X1 (balance sheet) ^^^ =782d. total equity at December 31, 20X1 (balance sheet) ^^^ =27262. 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 EarningsFor Yr ended 12/31/X1Beg blance RE, 1-1-X1 1500+ Net Income 487- Dividends ? (solve for ? = 211) _______Ending balance RE 12-31-X1 1776Dividends 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 equationo ***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 equationFor each of the following independent events, determine the effect on the accounting equation. = +Transaction Assets Liabilities Stockholders’equitya. owners invested cash in the business Cash UP Common Stock UPb. company borrowed cash from bank Cash UP Notes Payable UPc. company paid cash to purchase equipment Cash DOWNEquity UPd. company purchased equipment by signing a note payable at the bankEquity UP Notes Payable UP e. company completed job for customer and received cash =REVENUE UPCash UP Retained Earnings UPf. company paid employee wages for current month =EXPENSES UPCash DOWN 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, 2016Example #3 Rex Carswell Automotive CompanyRex 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. Rex invested personal funds in the amount of $12,000 in exchange for company stock.b. Rex borrowed $8,000 by signing a note payable at the Aggie National Bank.c. Paid $450 to rent a garage and parking area for use as a shop for the current month.d. 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.e. Paid $62 to advertise in the local newspaper during the current month.f. Completed several repair jobs and received cash from customers, $910.g. Completed a large repair job and billed the customer $1,000; customer promised to pay 25% of amount within 10 days.h. 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 cashi. Paid $275 in wages to part time helper, Dakota Chargerj. Received utility bill for the current month, $64; amount is due and will be paid by the 10th day of the following monthk. Rex Carswell Company paid a dividend of $500 to the sole stockholder, Rex CarswellRequired: 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’ EquityLane Company has been in business for five years. As of December 31, 2012, Lane had assets of $75,000and 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 madeJanuary 26/February 1, 2016into the business during 2013, and a dividend of $1,500 was paid to the owners.