CHAPTER 1 M1-4 Matching Financial Statement Items to ... - PageOut

CHAPTER 1
M1-4
Matching Financial Statement Items to Balance Sheet and Income Statement
Categories
According to its annual report, “Procter & Gamble (financial link) markets a broad range of
laundry, cleaning, paper, beauty care, health care, food and beverage products in more
than 140 countries around the world, with leading brands including Tide, Ariel, Crest,
Crisco, Vicks and Max Factor.” The following are items taken from its recent balance sheet
and income statement.
Required
Mark each item in the following list with letters to indicate whether it would be reported as
an Asset, Liability, or Stockholders' Equity account on the balance sheet or a Revenue or
Expense account on the income statement.

2
E1-4
Completing a Balance Sheet and Inferring Net Income
Ken Young and Kim Sherwood organized Reader Direct as a corporation; each contributed
$49,000 cash to start the business and received 4,000 shares of stock. The store
completed its first year of operations on December 31, 2009. On that date, the following
financial items for the year were determined: December 31, 2009, cash on hand and in the
bank, $47,500; December 31, 2009, amounts due from customers from sales of books,
$26,900; property and equipment, $48,000; December 31, 2009, amounts owed to
publishers for books purchased, $8,000; one-year note payable to a local bank for $2,850.
No dividends were declared or paid to the stockholders during the year.
Required:
R1. Complete the following balance sheet at December 31, 2009.
R2. As of December 31, 2009, did most of the financing for assets come from
creditors or stockholders
R3. Using the retained earnings equation and an opening balance of $0, work
backwards to compute the amount of net income for the year ended December
31, 2009.
R4. Assuming that Reader Direct generates net income of $3,000 and pays dividends
of $2,000 in 2010, what would be the ending Retained Earnings balance at
December 31, 2010

3
PA1-1
Preparing an Income Statement, Statement of Retained Earnings, and Balance Sheet
Assume that you are the president of High Power Corporation. At the end of the first year of
operations (December 31, 2010), the following financial data for the company are available:
Required:
R1. Prepare an income statement for the year ended December 31, 2010.
R2. Prepare a statement of retained earnings for the year ended December 31, 2010.
R3. Prepare a balance sheet at December 31, 2010.
PA1-2
Interpreting the Financial Statements
Refer to PA1-1.
Required:
R1. Evaluate whether the company was profitable.
R2. Evaluate whether the company could have paid a greater amount for dividends.
R3. Evaluate whether the company could have paid a greater amount for dividends.
R4. Determine the amount of cash increase or decrease that would be shown in the
statement of cash flows.