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Exrcise 6: Balance Sheet Equation

Transaction
Number

Asset

Liabilities

Owner's Equity

- 240,000
Cash

+240,000
rentals
+ 1,350,000

' :e h.:.:.t.:

No
-750,000

-750,000
Salaries

Cash

(0

- 100,000
Cash

(9,

- 68,500
Auavdnge fol
bbd dibts

+350,000
Loan pa],able

to,

-36.000

enlrv

Accumuleled

txpgllle_

Loan P
+12,37

No

-650,000
Owner's
withdrawal
-68,500

".

Cash

(m)
{nr

+1,350,0

A..rucd

exTens?s

+5e
-47.000
A.counts Davablc

depfeci,tioh

Lttilities F or
_47,000
ln.s..

o"#:17:':"

Transaction
Number

(al

(b)

(cl

+ 1,350,000

Operating

(e,

-750,000
- i00,000
+30,000
-40,000

dperdtiirgFin:uciDg

o)
(D

(k)

Owner's Equity

lllveSnng
Fin ancing

Irercise 10: Inconre Statenrent liormats

NatLLrc

ofExpensc
Laruan, lncorporated
lncome Stale]nent
Fof thc peflod ended 2XXrI,E97,000.00
70,000.00
1,967,000.00

Sales

Gain from sale of asset

Total revcnues
Lcssl

Enlployee compensaton and benefits


Purchases of raw materials

lJtrlities exneDse
Depreciation expense
Commission expense and seNice fee
lnsurance expense
Operating xpcnses
Interest expense
Total expenses

Income betbre tax


Income tax expense
Net income

663,950.00
569,100.00
113,820.00

94,850.00
56,910.00
1,688,330.00
72,000.00
1,760,330.00
206,670.00
62,001.00
144,669.00

Laruan, Incolporated
Income Statement
For the period-ended 2XX7
1,897,000.00
| ,049 ,799 .80
847,200.20

Sales

(1) Cost ofgoods sold


Gross

profit

Less:

(2) Selling expenses


1:; General and administrative expenses
Operating expenses
lnterest expense

Gain irom sale ofasset


llrcome beibre lax
lncome tax expense
Nel lncor'ne

r69,212.40
469,317.80
638,530.20
72,000.00
70,000.00
206,6'70.00
62,001.00
t44,669.00

Supporting computations for allocation ofexpenses to cost ofgoods sold, selling expenses and
general and administrative expenses:
Allocation of
Total

Cost ofgoods

Selling

sold

Ceneral and

Administrative

Purchases of law materials

569,i00 00

569,100.00

t80,700 00

7s,880.00

3?.940.00

75.880.00

39,837.00

15,934.80

'7,967.40

15,914.80

\ (qurprncrl tlu ,l

14,116 00

34,146.00

rrrur. (200i,)

22,16J.04

rn,ck (10%)

11.182.00

I1,382.00

display fixlufes (5%)

5,691.00

5,691.00

UtrLlrcs (l:loor Area)

Dlprecialr(lr (l:loor Area)


buiiding (35%)
fu.1'r

ofijc.'

lur

de|!cr!

Commission expense and service

fee

22.164.OO

t00%

94,850.00

94,850.00

40%
lnsurance exper)se (Floor Area)
Employee cornpeirsalion and benefi ts

c.

11,382.00

22,',764.00

16\212.40

469,317.80

33r,975.00

661,950.00

1,688,330.00

20%

22,764.00

56,910.00

1,049,799.80

Discuss the dilference between'nature ofexpense'

331,975.00

and'function ofexpense' format.

The "nature ofexpense" fonnat aggregates expenses according to their nature, for example,
dcprcciation, purchases ofnlatefials, lranspodatioll costs, enployee benefits al1d adveftising
costs. On the other hand, the "firnction ofexpense" format classifies expenses accolding to their
function (e.g., cost of sales, marketing, distribution, administratiorl).

4,.

Supporairg computations

a-

Interest paid
lnterest expense
l,ess:
Increase in accrued interest payable
Interest

paid

31,500
(3,000)
28,500

b. Income tax paid


lncome tax expense
Add:
Decrease in accrued income tax payable
Income tax paid

75,000
6,000
81,000

Proceds from sale of plant assets


Net book value ofplarlt assets sold
Less:
Loss from sale ofplanl
Proceeds from sale ofDlant assets

assels

27

,()utl

(9.000)
18,000

d. Proceeds from sale of marketable securities


Net book value ofmarketable securities sold
Add:
Cain from sale ofmarketable securities
Proceeds from sale ofmarketable securiries

e,

28,500
25,500
54,000

Acquisition ofplant assets


Plant assets (net), beginning
Less:
Net book value ofplant assets sold
Deprecialion

expense

Plant assets (net), end


Cost ofplant assets acquired

537,000

(21,000)
(112,500)
397,500
885,000
487,500

Acquisition of market{ble securities


Marketable securities, beginning
Less:
Cost ofmarketable securities

144,7 50

sold

end

Marketable securities,
Marketable securities acquircd
c.

(28,500)
1t6,250
16I,250
45,000

Proceeds from issuance ofcapital stock


Increase in capital stock

15,000

Add:
Increase in additional paid in capital
Proceed*s from issuance ofcapital

stock

120,000
135,000_

h. Proceeds from issuance of notes pavable


Notes payable, beginning
I-ess:
Paymenl ofnotes
Notes payable, end
Proceeds from issuance ofnotes

93,000
(69,000)
24,O00
75,000
51,000

PaymeDt ofdividends
Retained eamings, beginning
Add:
Net income
Retained earnings,
Pa),rnent

end

ofdividends

435,000
195.000
630,000
540,000
90,000

Exercise 14: Preparing StatemeDt of Cash Flows (from Appendix 2.2)

DEF Retail Company


Statement ofCash Flows
For the period endd December 31,2XX7
Cash Jlorv

from operalifig activities

Earmngs before interest and tax

301,500

Adjustrnculs
Gain or sale ofmarketable securilies
Loss from sale ofplant assets
Depreciation expense

(25,500)
9,000
112,500
397,500

Changes iD \\.orking capital


Dccfease in rn\'enlory
Increase in accounts receivable
Increase in prepn\'fienls
Dccfoase in accounts payable
Decrease in accrued expenses

45,000
(45,000)
(4.500)

(l2,oo0)
(10,500)
370,500

lnierest paid
Income tax paid
Net cash floss from operating activities

trom invesling activities


Proceeds from sale ofplant assets
Proceeds fronr sale ofmarkelable secuities

(28,500) a
(81,000) b
261,000

Cash Jlow

Acquisition of plant assets


Acquisition of marketable securities
Net cash flo\rs from iolestins actilities

tlox' from ftarrcing activities


Proceeds from issuance ofcapitai stock
Proceeds from issuance ofnotes payable
Payrent of notes payable
Payment ofdividends
Net cash florls from financine activities

18,000 c
54,000 d
(487,500) e
(45,000) f
(460,s00)

Caslr

Net chatrge in cash


Cash, beginning
Cash, end

135,000 g
51,000 h
(69,000)

(90,000) i
27,000

(t72,soo)
295,500
123,000

Exercise 15: Prepariog Statement of Cash Flows (from Apperdix 2.3)

DEF Retail Company


Statement of Cash Flows
For the perlod ended December 3l,2XX7
Cdsh

from operuting aclivilies

Cash received frorn customers


Caslr paid to suppliers
Cash paid for operating expenses

Interest paid
Incorne tax

paid

Nel cash flow from operating

activities

2,385,000
(1,182,000)
(832,500)
(28,500)
(81,000)
2,t 24,OOO
261,000

Supporting computations

a.

Cash received from customers


Sales

2,430,000

Less:
lncrease in accounts receivable
Cash received from customers

(45,000)
2,385,000

b. Cash paid to suppliers


Cost ofgoods sold
lss: Decrease in invntory
Add: Decrease in accounts payable
Cash paid to suppliers

1,215,000
(45,000)
12,000
1,182,000

Cash paid for operaiing expenses


Operating expenses
Less: Depreciation (non-cash expense)

930,000
I 12,500
817.500

Addl
Increase in prepaid expenses
Decrease in accrued expense payable
Cash paid for operating

expenses

4,500
10,500
832,500

a
b

Exercise

a.

l8i Mrs. Calon's Bakeshop

Mrs. Galon's January 1, 2XX5 and January l, 2XX7 Balance Sheet


Mrs. Galon's Bakeshop
Balance Sheet
January l, 2XX5

Assets
Cash

Baking equipment

r00,000
7s,000

Total assets

175 000

Liabilities and Owner's Eouitv


Owner's Equity

175,000

Total liabilities and owner's


Equity

175,000

Mrs. Galon's Bakeshop


Balance Sheel
January l, 2XX7
Assets
Cash

Accounts Receivable
Baking supplies
Total curent assets
Equipment (l)
Total assets

122,180

Liabilities and Owner's Equity


Accountspayable

24,500
184.880
I I1,829

296.709

Owner's Equity (2)

284,209

Total liabilities and owner's


Equity

296,709

Suppoding computations:

(l)

Equipment

Baking equipment
Cosl
Useful life
Number of years used
Remaining useful life
Annual depreciation = 75,000 / 7
Accumulated
Net book value: Cost - Accumulated

12,500

38,200

75,000
7 years
2 years
5 years
to,'114

2t-429

allon

iJ.)

/I

Two Ovens
Cosl (P25,000 each)
Useful life
Number of years used
Remaining usetul life
Annual depreciation = 50,000 / 6
Accumulated
iation
Net book !alue = Cost - ,q,ccu.ulat.d

50,000
6 years
I years
5 years

ation

8,333

4I,667

Refrigerator
Cost
Useful life
Number ofyears used
Remaining useful life
turnual depreciatiot] = 18,250 / l1
Accumulated depreciation
Nel book varue = Cost Accumulared dc

18,250
I I years
I years
10 years

I,6s9
1,659

ciation

16,591

Net book values of equipmetrt


Baking quipment
53,57 r
Ovens
41,667

(2) Owner's Capital


Total assets, January 1, 2XX7
Less: Total Uabilities, J
Owner's Capital

b.

r,2xx7

296,709
12,500
284,209

Was Mrs. Galorl's Bakeshop operation,s profitable? Why or why


not?

Capital account increase suggests business is not losillg. ln fact,


retum on capi t^l is 62.4oA ovet
the period or >30% per year which is more than what
can be obiain"A irr_o.iuuurf*f"
inveshnent instrunrents in the market. Income eamed for the periods
2
are computed as follows:

Owner's Capital, January 1, 2XX7


Less: Owner's
ital. J
1. 2XX5
lncrease in Owner's

284,209
175.000
109.209

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on

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Sale

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6Lq,D0.0c

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rllt*;ttr^1"',e aa rsq]oo

-d>A

tq,100
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utilih

31.Y+b

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lctg1D)

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nel'r''4r'^r
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