Financial Statement Relationships

First of all, let me address some of the more common questions that arise:

How frequently will there be assignments I will assign formal homework which is ALWAYS to be submitted to me via CengageNOW, unless otherwise noted. In addition, I will pose questions in my letters, announcements and discussion comments that I expect you will address in the Discussion Forums. You should be checking that Discussion Board, and participating, on a frequent basis, preferably daily. Please feel free to post questions about the assignments to the Discussion Board. You should be asking questions and providing comments in the Discussion Board on a consistent basis throughout each chapter. The bare minimum level of participation is three times per chapter. I expect this class to be a collaborative effort, and it is okay to ask for and to provide help on homework assignments.

Finally, watch for web links that I include in these letters! Sometimes, I will try to send you to some interesting spots on the web, but unless you click on the highlighted text, you won't go there!

Now, on to some accounting:

First, Problem #2:

	Set A	Set B	Set C
Income Statement
Revenues	$1,100	$6,800	$240
Expenses	800	5,200	160
Net Income	300	1,600	80

Statement of Owner’s Equity
Beginning Balance	$2,900	$24,400	$340
Net Income	300	1,600	80
Less Withdrawals	(200)	_	(40)
Ending Balance	$3,000	$26,000	$380

Balance Sheet
Total Assets	$4,600	$31,000	$380
Liabilities	1,600	5,000	-
Owner’s Equity
Owner’s Capital	3,000	26,000	380
Total Liabilities and Owner’s Equity	$4,600	$31,000	$380

The methodology used here is to look for the equations with the single missing variable, and solve for that unknown. Then, use the links between the statements to fill in the blanks. For instance, on Set B, you can't solve the income statement unknowns first, even though Needles tricks you by labeling expenses and net income as (g) and (h). (As accountants, we are linear thinkers and like order, but that won't help here!) Instead, you can solve for net income on the statement of owners’ equity (Ending owner’s equity plus withdrawals minus beginning owners’ equity equals net income). Then, plug that net income number back into the income statement to solve for expenses (Revenues minus net income equals expenses.) Finally, on the balance sheet, plug the ending owners’ equity total from the statement of owners’ equity, then derive total liabilities plus owner’s equity, which must be the same as total assets.

On problem 3, (page 31) you are given beginning owners’ equity, and then December ending balances in assets and liabilities, plus results of transactions for the year. First of all, prepare an income statement to organize the revenues and expenses.

Fuel Designs'
Income Statement
For the Year Ended December 31, 2014

Revenues
Commissions sales revenue	$400,000
Total revenues		$400,000
Expenses
Commissions expense	$225,000
Office rent expense	36,000
Wage expense	32,000
Marketing expense	20,100
Telephone and Computer expense	5,100
Supplies expense	2,600
Total expenses		320,800
Net Income		$79,200

Note that the income statement covers a period of time, and that the revenues and expenses are summarized on a separate line item. Then, use that net income in the statement of owner’s equity.

Fuel Design
Statement of Owners’ Equity
For the Year Ended December 31, 2014

Owners Capital, December 31, 2013	$64,300
Net Income for the Year	79,200
Subtotal	$143,500
Less Withdrawals	33,000
Owners Capital, December 31, 2014	$ 110,500

Fuel Design
Balance Sheet
December 31, 2014

Assets		Liabilities
Cash	$71,700	Accounts Payable	$3,600
Accounts Receivable	4,500	Commissions Payable	22,700
Supplies	700	Total Liabilities		$26,300
Equipment	59,900	Owners' Equity
		Owner’s capital		$110,500
Total Assets	$136,800	Total Liabilities and Owner’s Equity		$136,800

The balance sheet is dated as of a specific date, and only shows the ending balances of the accounts at that point in time. Hence, the effect of that additional investment is reported as the ending balance of the owner’s capital account. The transaction itself would be reported on the statement of cash flows, shown on page #10. Also, when the owner’s invest, the company cash increases and the owner’s equity increases.

Clifford