Solutions to Review Questions, January 24, 2006 1. a. Unlike the balance sheet, which reports financial position (or ?financial condition?) at a point in time, the ?change statements? cover a period of time. The change statements are, therefore, the income statement (or ?statement of operations?), the statement of retained earnings, the statement of stockholders? equity, and the statement of cash flows. 2. b. We can use the accounting equation. Even though we don't know the beginning balances, we know the change in assets and we are given enough information to compute the change in stockholders' equity, so we can assume any beginning balance (e.g., zero). Assets = Liabilities + Stockholders' Equity -0- = -0- + -0- + 295,000 197,700 109,500 + 25,500 $52,000 = $38,700 + $13,300 3. c. Using a T-account: Accounts Payable 26,700 normal balance is credit (Cash paid reduces Accounts Payable) 978,900 986,300 34,100 Or, beginning balance + purchases on account ? cash paid = ending balance. Thus, $26,700 + $986,300 - $978,900 = $34,100 4. c. Accrual-basis revenue is recognized as it is earned, irrespective of when the cash is received. Because one-third of the work was completed by December 31, 2002, one-third of the revenue will be recognized. $360,000 x 1/3 = $120,000. 5. b. Using our known relationship between the beginning and ending balances: Beginning balance in retained earnings $3,536,000 + Revenues 4,992,000 Expenses ? Dividends 2,080,000 Ending balance in retained earnings $3,369,600 Thus, expenses = $3,078,400, and net income = $4,992,000 $3,078,400 = $1,913,600.
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