Financial Statements

Once the trial balance is prepared, the financial statements can be prepared using such data. The Guitar Lessons Corporation's October income statement, statement of retained earnings, and balance sheet are shown below, prepared from the company's October 31 trial balance. Note: the Guitar Lessons Corporation's October 31 trial balance was presented before the Practice Exercise.

Financial Statements: Income Statement

 

Guitar Lessons Corporation
Income Statement
For the Month Ended October 31

Fees Revenue

 

$2,300

Less: Supplies Expense

$450

 

        Wages Expense

600

1,050

Net Income

 

$1,250

Question: What did management do with the company's resources in October?

 

The income statement shows the company's management used the company's resources in October to generate additional resources of $1,250 (net income). Management brought in resources of $2,300 (fees revenue) and used up resources of $1,050 (supplies expense and wages expense).

Financial Statements: Statement of Retained Earnings

 

Guitar Lessons Corporation
Statement of Retained Earnings
For the Month Ended October 31

Balance, October 1

$3,445

Plus: Net Income for October

1,250

Subtotal

$4,695

Less: Dividends in October

90

Balance, October 31

$4,605

Question : What did the company do with the resources generated by management in October?

The statement of retained earnings shows that of the $1,250 additional resources generated by management in October (net income), the company distributed $90 to the owner (dividends). By the end of October, the company retained in the business $4,605 resources generated by management (retained earnings balance on October 31).

 

Financial Statements: Balance Sheet

 

Guitar Lessons Corporation
Balance Sheet
October 31

Assets

 

    Cash

$10,280

    Accounts Receivable

1,200

    Supplies

525

Total Assets

$12,005

Liabilities

 

    Accounts Payable

$400

Total Liabilities

$400

Stockholders' Equity

 

    Common Stock

$7,000

    Retained Earnings

4,605

Total Stockholders' Equity

$11,605

Total Liabilities and Stockholders' Equity

$12,005

Question: What are the company's resources on October 31?

The balance sheet shows that on October 31 the company has assets (resources) of $12,005. The assets consist of $10,280 cash, $1,200 accounts receivable, and $525 supplies.

Question: Where did the company get its October 31 resources?

The balance sheet shows the company obtained $400 assets through borrowing (liabilities). Resources of $7,000 were obtained from the owner (common stock) and $4,605 of resources were generated by management and kept in the business (retained earnings).
 

Practice Exercise

 

The following information was taken from the McDonald's Corporation's December 31, 2006 accounting records (all dollar amounts are in millions): assets = $29,024, liabilities = $13,566, common stock = $3,462, retained earnings, 12/31/05 = $9,669, dividends = $1,217, revenues = $21,586, and expenses = $18,042.

Determine the dollar amount of the McDonald's Corporation's total resources on December 31, 2006.

Resources are called assets. The McDonald's Corporation's total assets on December 31, 2006 were $29,042 million.

Determine the dollar amount of the McDonald's Corporation's December 31, 2006 total resources that had been borrowed.

Sources of borrowed resources are called liabilities. The McDonald's Corporation's total liabilities were $13,566 million on December 31, 2006.

Determine the dollar amount of the McDonald's Corporation's December 31, 2006 total resources that had been invested by owners.

Sources of owner-invested resources are called common stock. The McDonald's Corporation's common stock was $3,462 million on December 31, 2006.

Determine the net dollar amount of the McDonald's Corporation's December 31, 2006 resources that had been generated by management in 2006.

Sources of management-generated resources during a specific time period are call net income. Net income is calculated by subtracting expenses from revenues. The McDonald's Corporation's net income for 2006 was $3,544 million ($21,586 revenues - $18,042 expenses).

Determine the dollar amount of the McDonald's Corporation's December 31, 2006 resources generated by management during 2006 and kept in the business at the end of 2006.

Sources of resources generated by management are called net income. Net income can be kept in the company or distributed to owners through dividends. McDonald's Corporation's 2006 net income was $3,544 million and it paid dividends of $1,217 million to owners. Thus, of the $3,544 million of resources generated by management in 2006, $2,327 million ($3,544 - $1,217) were kept in the company at the end of 2006.

Determine the dollar amount of the McDonald's Corporation's December 31, 2006 total resources that were generated by management since the company was founded and were still kept in the business at the end of 2006.

Retained earnings is the source of the dollar amount of resources generated by management and kept in the business. The McDonald's Corporation's December 31, 2006 retained earnings was $11,996 million ($9,669 12/31/05 retained earnings + $3,544 net income - $1,217 dividends).


** You now have the background to do text exercise 3.6 and text problems 3.1 and 3.2.

 

 

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