Preparing a Balance Sheet

Honda Motor Corporation of Japan is a leading international manufacturer of automobiles, motorcycles, all-terrain vehicles,
and personal watercraft. As a Japanese company, it follows Japanese GAAP andreports its financial statements in billions
of yen (the sign for yen is ¥). Its recent balance sheet contained the following items (in billions). Prepare a balance sheet as
of March 31, 2007, solving for themissing amount. (Hint: Exhibit 1.2 in the chapter provides a good model for completing
this exercise.)
Cash and cash equivalents ¥ 946
Contributed capital 123
Accounts payable and other current liabilities 4,288
Inventories 1,183
Investments 742
Long-term debt 1,906
Net property, plant, and equipment 2,079
Other assets 4,606
Other liabilities 1,238
Retained earnings 4,482
Total assets 12,037
Total liabilities and stockholders’ equity ?
Trade accounts, notes, and other receivables 2,481

HONDA MOYOR CORPORTION

Balance Sheet
March 31,2007
Assets
Cash and cash equivalents ¥ 946
Trade accounts, notes, and other receivables ¥ 2,481
Inventories ¥ 1,183
Investments ¥ 742
Net property, plant, and equipment ¥ 2,079
Other assets ¥ 4,606
Total Assets ¥ 12,037

Liabilities & Stockholders Equity

Accounts payable and other current liabilities ¥ 4,288
Long-term debt ¥ 1,906
Other liabilities ¥ 1,238
Total liabilities ¥ 7,432

Stockholders’ Equity
Contributed capital ¥ 123
Retained earnings ¥ 4,482
Total Stockholders’ Equity ¥ 4,605
Total liabilities & Stockholders’ Equity ¥ 12,037

Completing a Balance Sheet and Inferring Net Income

Terry Lloyd and Joan Lopez organized Read More Store as a corporation; each contributed $75,000 cash to start the business
and received 4,000 shares of common stock. The store completed its first yearof operations on December 31, 2010. On that
date, the following financial items for the year were determined: December 31, 2010, cash on hand and in the bank, $73,350;
December 31, 2010, amounts due from customers from sales of books, $39,000; unused portion of store and office
equipment, $72,000; December 31, 2010, amounts owed to publishers for books purchased, $12,000; one-year note payable
to a local bank for $3,000. No dividends were declared or paid to the stockholders during the year.

Yahya Mubeen
Required:
1. Complete the following balance sheet as of the end of 2010.
2. What was the amount of net income for the year? (Hint: Use the retained earnings equation [Beginning Retained
Earnings + Net Income — Dividends = Ending Retained Earnings] to solve for net income.)

Read More Store

Balance Sheet
December 31,2010
Assets Liabilities
Cash $73,350 Accounts payable $12,000
Accounts receivable 39,000 Note payable 3,000
Store and office equipment 72,000 Interest payable 120
Total liabilities $15,120
Stockholders’ Equity
Contributed capital $150,000
Retained earnings 19,230
Total stockholders’ equity 169,230
Total assets $184,350 Total liabilities & stockholders’ equity $184,350

Analyzing Revenues and Expenses and Preparing an Income Statement

Assume that you are the owner of The University Shop, which specializes in items that interest students. At the end of
January 2010, you find (for January only) this information:
a. Sales, per the cash register tapes, of $110,000, plus one sale on credit (a special situation) of
$3,000.
b. With the help of a friend (who majored in accounting), you determined that all of the goods sold during January had
cost $40,000 to purchase.
c. During the month, according to the checkbook, you paid $37,000 for salaries, rent, supplies, advertising, and other
expenses; however, you have not yet paid the $900 monthly utilities for January on the store and fixtures.
Required:
On the basis of the data given (disregard income taxes), what was the amount of net income for January? Show
computations. (Hint: A convenient form to use has the following major side captions: Revenue from Sales, Expenses, and
the difference—Net Income.)

THE UNIVERSITY SHOP

Income Statement
At the end of January, 2010
Revenue from Sales 110,000
Sales on Credit 3,000
Total Sales 113,000
Cost of Goods Sold (40,000)
Gross Profit 73,000
Expenses
Salaries 20,000
Rent 10,000
Supplies 2,000
Advertising 5,000
Utilities 900
Total Expenses 37,900
Net Income 35,100

Yahya Mubeen
Preparing an Income Statement and Inferring Missing Values
Walgreen Co. is the nation’s leading drugstore chain. Its recent quarterly income statement contained the following items (in
millions). Solve for the missing amounts and prepare an income statement for the quarter ended May 31, 2007. (Hint: First
order the items as they would appear on the income statements and then solve for the missing values. Exhibit 1.3 in the chapter
provides a good model for completing this exercise.)
Cost of sales $9,821
Provision for income taxes* 305
Interest revenue 11
Net earnings ?
Net sales 13,698
Pretax income ?
Selling, occupancy and administration expense 3,022
Total expenses ?
Total revenues ?

Walgreen Co.
Income Statement
Quarter Ended May 31, 2007 (in millions)
Revenues
Net sales 13,698
Interest revenue 11
Total revenues 13,709
Expenses
Cost of sales 9,821
Selling, occupancy and administration expense 3,022
Total expenses 12,843
Pretax income before taxes 866
Provision for income taxes 305
Net earnings 561

Analyzing Revenues and Expenses and Completing an Income Statement

Home Realty, Incorporated, has been operating for three years and is owned by three investors. J. Doe owns 60 percent of the
total outstanding stock of 9,000 shares and is the managing executive in charge. On December 31, 2012, the following
financial items for the entire year were determined: commission earned and collected in cash, $150,900, plus $16,800
uncollected; rental service fees earned and collected, $20,000; salaries expense paid, $62,740; commissions expense paid,
$35,330; payroll taxes paid, $2,500; rent paid, $2,475 (not including December rent yet to be paid); utilities expense
paid, $1,600; promotion and advertising paid, $7,750; income taxes paid, $19,400; and miscellaneous expenses paid, $500.
There were no other unpaid expenses at December 31. Also, during theyear, the company paid the owners “out-of-profit” cash
dividends amounting to $12,000. Complete thefollowing income statement:

Yahya Mubeen
 Home Realty Incorporated
Income Statement
December 31, 2012
Revenues
Commissions earned + Uncollected $150,900+16,800
Rental service fees 20,000
Total revenues $187,700
Expenses
Salaries expense 62,740
Commission expense 35,330
Payroll tax expense 2,500
Rent expense 2,475+225
Utilities expense 1,600
Promotion and advertising expense 7,750
Miscellaneous expenses 500
Total expenses (excluding income taxes) (113,120)
Pretax income 74,580
Income tax expense (19,400)
Net income $55,180

Inferring Values Using the Income Statement and Balance Sheet Equations
Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each
independent case to compute the two missing amounts for each case. Assume that itis the end of 2010, the first full year of
operations for the company. (Hint: Organize the listed items as they are presented in the balance sheet and income statement
equations and then compute the missing amounts.)

Independent Total Total Net Income Total Total Stockholders’

Cases Revenues Expenses (Loss) Assets Liabilities Equity
A $94,700 $76,940 $17,760 $140,200 $66,000 $74,200
B 98,980 84,240 $14,740 107,880 28,870 79,010
C 69,260 76,430 ($7,170) 97,850 69,850 28,000
D 58,680 38,910 $19,770 96,570 17,890 78,680
E 84,840 78,720 $6,120 100,100 20,520 79,580

Inferring Values Using the Income Statement and Balance Sheet Equations
Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each
independent case to compute the two missing amounts for each case. Assume that it is theend of 2011, the first full year of operations
for the company. (Hint: Organize the listed items as they arepresented in the balance sheet and income statement equations and
then compute the missing amounts.)

Independent Total Total Net Income Total Total Stockholders’

Cases Revenues Expenses (Loss) Assets Liabilities Equity
A $231,820 $186,700 $45,120 $294,300 $75,000 $219,300
B 195,700 175,780 $19,920 590,000 241,600 348,400
C 72,990 91,890 ($18,900) 258,200 200,760 57,440
D 36,590 22,750 $13,840 287,200 189,675 97,525
E 224,130 210,630 $13,500 645,090 173,850 471,240

Yahya Mubeen
Preparing an Income Statement and Balance Sheet
Clay Corporation was organized by five individuals on January 1, 2011. At the end of January 2011, the following
monthly financial data are available:
Total revenues $299,000
Total expenses (excluding income taxes) 184,000
Income tax expense (all unpaid as of January 31) 34,500
Cash balance, January 31, 2011 70,150
Receivables from customers (all considered collectible) 34,500
Merchandise inventory (by inventory count at cost) 96,600
Payables to suppliers for merchandise purchased from them
(Will be paid during February 2011) 26,450
Contributed capital (2,600 shares) 59,800
No dividends were declared or paid during 2011.

Required:
Complete the following two statements:

Income Statement
For the Month of January 2011
Total revenues $299,000
Less: Total expenses (excluding income tax) 184,000
Pretax income 115,000
Less: Income tax expense (34,500)
Net income $80,500

Balance Sheet
For the Month of January 2011
Assets
Cash 70,150
Receivables from customers 34,500
Merchandise inventory 96,600
Total assets 201,250
Liabilities
Payables to suppliers 26,450
Income taxes payable 34,500
Total liabilities 60,905
Stockholders’ Equity
Contributed capital 59,800
Retained earnings 80,500
Total stockholders’ equity 140,300
Total liabilities and stockholders’ equity 201,205

Yahya Mubeen
 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, 2009. For its first two years of operations, itreported the following:
Net income for 2009 $34,000
Net income for 2010 42,000
Dividends for 2009 14,200
Dividends for 2010 18,700
Total assets at the end of 2009 130,000
Total assets at the end of 2010 250,000

STONE CULTURE CORPORATION

Statement of Retained Earning
December 31, 2009
Beginning Retained Earnings, January 1, 2009 0
Add: Net Income for 2009 34,000
Less: Dividends for 2009 (14,200)
Retained Earnings, December 31, 2009 19,800

STONE CULTURE CORPORATION

Statement of Retained Earning
December 31, 2010
Beginning Retained Earnings, January 1, 2010 19,800
Add: Net Income for 2010 42,000
Less: Dividends for 2010 (18,700)
Retained Earnings, December 31, 2010 43,100
Preparing a Statement of Cash Flows
NITSU Manufacturing Corporation is preparing the annual financial statements for the stockholders. A statement of cash
flows must be prepared. The following data on cash flows were developed for the entire year ended December 31, 2011: cash
collections from sales, $280,000; cash expended for operating expenses, $175,000; sale of unissued NITSU stock for cash,
$30,000; cash dividends declared and paid to stockholders during the year, $18,000; and payments on long-term notes payable,
$80,000. During the year, a tract of land held as an investment was sold for $10,000 cash (which was the same price that
NITSU had paid for the land in 2010), and $48,000 cash was expended for two new ma- chines. The machines were used in
the factory. The beginning-of-the-year cash balance was $63,000.
Required:
Prepare the statement of cash flows for 2011. Follow the format illustrated in the chapter.

Operating Activities Investing Activities Financing Activities

Cash collections from sales $280,000 Sale of investment in land 10,000 Sale of unissued NITSU $30,000
stock for cash
Cash expended for operating ($175,000) Purchase of machines for ($48,000) Payments on long-term ($80,000)
expenses factory notes payable
Cash dividends declared ($18,000)
and paid to stockholders
Net cash provided by operating $105,000 Net cash used in investing ($38,000) Net cash used in financing ($68,000)
activities activities activities
Operating Activities+ Investing Activities+ Financing Activities = Net cash increase or decrease
$105,000 + ($38,000) + ($68,000) = ($1,000)
Cash balance, beginning of year $63,000
Net decrease cash ($1,000)
Cash balance, end of year $62,000

Yahya Mubeen
Preparing an Income Statement, Statement of Retained Earnings, and Balance Sheet
Assume that you are the president of Propane Company. At the end of the first year (December 31, 2009) of operations,
the following financial data for the company are available:
Cash $22,500
Receivables from customers (all considered collectible) 10,800
Inventory of merchandise (based on physical count and priced at cost) 81,000
Equipment owned, at cost less used portion 40,700
Accounts payable owed to suppliers 46,140
Salary payable for 2009 (on December 31, 2009, this was
owed to an employee who was away because of an emergency; will return around January 10,
2010, at which time the payment
will be made) 1,800
Total sales revenue 126,000
Expenses, including the cost of the merchandise sold
(excluding income taxes) 80,200
Income taxes expense at 30% × pretax income; all paid during 2009 ?
Contributed capital, 7,000 shares outstanding 87,000
Dividends declared and paid during 2009 12,000
Required (show computations):

Using the financial statement exhibits in the chapter as models:

1. Prepare a summarized income statement for the year 2009.
2. Prepare a statement of retained earnings for the year 2009.
3. Prepare a balance sheet at December 31, 2009

Propane Compony
Income Statement
At the end of December 31, 2009
Sales revenue $126,000
Expenses (Include CGS Cost) (80,200)
Gross profit 45,800
Income taxes expense (13,740)
Net income 32,060

Propane Compony
Statement of Retained earning
At the end of December 31, 2009
Retained earnings, December 31, 2008 $0
Add: Net income for the year 2009 32,060
Less: Dividends declared and paid during 2009 (12,000)
Retained earnings, December 31, 2009 $20,060

Yahya Mubeen
 Propane Compony
Balance sheet
At the end of December 31, 2009
Assets
Cash $22,500
Receivables $10,800
Inventory $81,000
Equipment $40,700
Total Assets $155,000
Liabilities
Accounts Payable $46,140
Salary Payable $1,800
Total Liabilities $47,940
Stockholders’ equity
Contributed Capital $87,000
Retained Earnings $20,060
Total Stockholders' Equity $107,060
Total Liabilities and Stockholders' Equity $155,000

Analyzing a Student’s Business and Preparing an Income Statement

During the summer between her junior and senior years, Susan Irwin needed to earn sufficient money for the coming
academic year. Unable to obtain a job with a reasonable salary, she decided to try the lawn care business for three
months. After a survey of the market potential, Susan bought a used pickup truck on June 1 for $1,500. On each door
she painted “Susan’s Lawn Service, Phone 471-4487.” She also spent $900 for mowers, trimmers, and tools. To
acquire these items, she borrowed $2,500 cash by signing a note payable promising to pay the $2,500 plus interest of
$65 at the end of the three months (ending August 31).
At the end of the summer, Susan realized that she had done a lot of work, and her bank account looked good. This fact
prompted her to become concerned about how much profit the business had earned.
A review of the check stubs showed the following: Bank deposits of collections from customers totaled $12,300. The
following checks had been written: gas, oil, and lubrication, $940; pickup repairs, $250; mower repair, $110;
miscellaneous supplies used, $80; helpers, $4,200; payroll taxes, $190; payment for assistance in preparing payroll
tax forms, $25; insurance, $125; telephone, $110; and $2,565 to pay off the note including interest (on August 31). A
notebook kept in the pickup, plus some unpaid bills, reflected that customer still owed her $700 for lawn services rendered
and that she owed $180 for gas and oil (credit card charges). She estimated that the cost for use of the truck and the other
equipment (called depreciation) for three months amounted to $600.

Required:
1. Prepare a quarterly income statement for Susan’s Lawn Service for the months June, July, and August 2011.
Use the following main captions: Revenues from Services, Expenses, and Net Income. Because this is a sole
proprietorship, the company will not be subject to income tax.
2. Do you see a need for one or more additional financial reports for this company for 2011 and thereafter?
Explain.

Yahya Mubeen
 Susan’s Lawn Service
Quarterly Income Statement
For the year ended August 31, 2011
Revenues
Revenues from Services $12,300
Uncollected $700
Total Revenues $13000
Expenses
Gas, oil, and lubrication $940
Pickup repairs $250
Mower repair $110
Miscellaneous supplies used $80
Helpers $4,200
Payroll taxes $190
Payment for assistance in preparing payroll tax forms $25
Insurance $125
Telephone $110
Interest expense $65
Gas And Oil $180
Depreciation expense $600
Total Expense ($6,875)
Net Income 6,125

Comparing Income with Cash Flow (A Challenging Problem)

Ace Trucking Company was organized on January 1, 2010. At the end of the first quarter (three months) of operations,
the owner prepared a summary of its activities as shown in the first row of the following tabulation:

Computation of
Summary of Transactions Income Cash
a. Services performed for customers, $66,000, of which $11,000 remained uncollected at the end of
the quarter. +$66,000 +$55,000
b. Cash borrowed from the local bank, $35,000 (one-year note).
c. small service truck purchased at the end of the quarter to beused in the business for two years
starting the next quarter:cost, $9,500 cash.
d. Wages earned by employees, $23,000, of which one-half remained unpaid at the end of the
quarter.
e. Service supplies purchased for use in the business, $3,800 cash, of which $900 were unused
(still on hand) at the end of the quarter.
f. Other operating expenses, $39,000, of which $6,500 remained unpaid at the end of the quarter.

Based only on these transactions, compute the following for the quarter:
Income (or loss)
Cash inflow (or outflow)

Required:
1. For each of the six transactions given in this tabulation, enter what you consider the correct amounts.
Enter a zero when appropriate. The first transaction is illustrated.
2. For each transaction, explain the basis for your dollar responses

Yahya Mubeen
 Computation of
Summary of Transactions Income Cash
a. Services performed for customers, $66,000, of which $11,000 remained uncollected at the end of
the quarter. +$66,000 +$55,000
b. Cash borrowed from the local bank, $35,000 (one-year note). $0 +$35,000
c. small service truck purchased at the end of the quarter to beused in the business for two years $0 -$9,500
starting the next quarter:cost, $9,500 cash.
d. Wages earned by employees, $23,000, of which one-halfremained unpaid at the end of the -$23,000 -$11,500
quarter.
e. Service supplies purchased for use in the business, $3,800 cash, of which $900 were unused (still -$2,900 -$3,800
on hand) at the end of the quarter.
f. Other operating expenses, $39,000, of which $6,500 remained unpaid at the end of the quarter. -$39,000 -$32,500

Based only on these transactions, compute the following for the quarter: +$1,100 +$32,700
Income (or loss)
Cash inflow (or outflow)

2. Explanation of the Basis for Dollar Responses:

a) Services performed for customers: The company earned $66,000 by providing services to its customers. However,
$11,000 remained uncollected at the end of the quarter, so the cash inflow is $55,000.
b) Cash borrowed from the local bank: The company borrowed $35,000 from the bank, which is a cash inflow.
c) small service truck purchased: The company purchased a truck for $9,500 in cash, which is a cash outflow.
d) Wages earned by employees: The company incurred $23,000 in wages, but one-half ($11,500) remained unpaid at
the end of the quarter. Therefore, the income is reduced by $11,500 and the cash outflow is also $11,500.
e) Service supplies purchased: The company purchased service supplies for $3,800 in cash, but $900 were unused at
the end of the quarter. Therefore, the cash outflow is $3,800 and there is no impact on income.
f) Other operating expenses: The company incurred operating expenses of $39,000, but $6,500 remained unpaid at the
end of the quarter. Therefore, the income is reduced by $32,500 and the cash outflow is also $32,500.

Evaluating Data to Support a Loan Application (A Challenging Problem)

On January 1, 2009, three individuals organized West Company as a corporation. Each individual invested $10,000 cash in
the business. On December 31, 2009, they prepared a list of resources owned(assets) and a list of the debts (liabilities) to
support a company loan request for $70,000 submitted to alocal bank. None of the three investors had studied accounting. The
two lists prepared were as follows:
Company resources
Cash $ 12,000
Service supplies inventory (on hand) 7,000
Service trucks (four practically new) 68,000
Personal residences of organizers (three houses) 190,000
Service equipment used in the business (practically new) 30,000
Bills due from customers (for services already completed) 15,000
Total $322,000
Company obligations
Unpaid wages to employees $19,000
Unpaid taxes 8,000
Owed to suppliers 10,000
Owed on service trucks and equipment (to a finance company) 50,000
Loan from organizer 10,000
Total $ 97,000

Yahya Mubeen
Required:
Prepare a short memo indicating:
1. Which of these items do not belong on the balance sheet? (Bear in mind that the company is considered to be
separate from the owners.)
2. What additional questions would you raise about the measurement of items on the list? Explain the basis for
each question.
3. If you were advising the local bank on its loan decision, which amounts on the list would create special
concerns? Explain the basis for each concern and include any recommendations that you have.
4. In view of your responses to (1) and (2), what do you think the amount of stockholders’ equity (i.e., assets minus
liabilities) of the company would be? Show your computations.

Solution
1. The personal residences of the organizers do not belong on the balance sheet because they are not company
assets.
2. Additional questions that could be raised include:
✓ Are the service supplies inventory and bills due from customers valued correctly?
✓ How was the value of the service equipment determined?
✓ Are the amounts owed to suppliers and the finance company current and accurate?
✓ Are there any other debts or obligations that have not been included on the list?
3. The amounts on the list that would create special concerns for the local bank include:
✓ The company owes a significant amount on service trucks and equipment to a finance company, which
could potentially put the company at risk if they are unable to make payments.
✓ The unpaid wages and taxes suggest that the company may have cash flow issues or financial
mismanagement.
✓ The loan from the organizer raises questions about the company's ability to generate enough income to
repay the loan.
Recommendations for the local bank could include requiring collateral or additional financial information
from the company, as well as setting terms and conditions for the loan to ensure that the company can make
timely payments.
4. The amount of stockholders' equity can be calculated as follows:
Assets - Liabilities = Stockholders' Equity
$322,000 - $97,000 = $225,000

Yahya Mubeen