In Exhibit 2, the September transactions for Family Health Care are listed in the order that they occurred. This exhibit, however, is not very user-friendly in that it does not group and summarize like transactions together. As we described and illustrated in Chapter 1, the accounting reports that provide this summarized information are financial Prepare financial state-
ments for a corporation’s first period of operations.
3
statements. Such financial statements can easily be prepared from the integrated financial statement framework shown in Exhibit 2.
The September financial statements for Family Health Care are illustrated in Exhibit 4. The data for the statements were taken from Exhibit 2.
Exhibit 4
Family Health Care Financial Statements for September
Net income for September $2,600
Less dividends 1,500
Retained earnings, September 30, 2007 $1,100
Family Health Care, P.C.
Balance Sheet September 30, 2007
Assets
Cash $ 5,100
Land 12,000
Total assets $17,100
Liabilities
Notes payable $10,000
Stockholders’ Equity
Capital stock $6,000
Retained earnings 1,100 7,100
Total liabilities and stockholders’ equity $17,100
Fees earned $5,500
Operating expenses:
Wages expense $1,125
Rent expense 950
Utilities expense 450
Interest expense 100
Miscellaneous expenses 275
Total operating expenses 2,900
Net income $2,600
Family Health Care, P.C.
Income Statement
For the Month Ended September 30, 2007
Family Health Care, P.C.
Retained Earnings Statement For the Month Ended September 30, 2007
The income statement is normally prepared first using the income statement col- umn of Exhibit 2. The income statement is prepared first because the net income or loss is needed to prepare the retained earnings statement. The retained earnings statement is prepared next because the ending balance of retained earnings is needed for prepar- ing the balance sheet. The retained earnings statement is prepared using the income statement and the amount recorded for dividends for the period. The balance sheet is prepared next using the balances as of September 30 shown in Exhibit 2. The statement of cash flows is normally prepared last using the statement of cash flows column of Exhibit 2. You should note that each financial statement is identified by the name of the business, the title of the statement, and the date or period of time.
Income Statement
As shown in Exhibit 4, the income statement for Family Health Care reports fees earned of $5,500, total operating expenses of $2,900, and net income of $2,600. The
$5,500 of fees earned was taken from the income statement column of Exhibit 2.
Likewise, the expenses were summarized from the income statement column of Exhibit 2 and reported under the heading “Operating expenses.” The expenses were listed in order of size, beginning with the largest expense. Miscellaneous expense is usually shown as the last item, regardless of the amount. The total operating expenses were then subtracted from the fees earned to arrive at the net income of $2,600. The effect of this net income will be to increase retained earnings and stockholders’ equity.
Retained Earnings Statement
Since Family Health Care has been in operation for only one month, it has no retained earnings at the beginning of September. The ending September balance is the change in retained earnings that results from net income and dividends. This change, $1,100, will be the beginning retained earnings balance for October.
Exhibit 4
Concluded
Family Health Care, P.C.
Statement of Cash Flows
For the Month Ended September 30, 2007 Cash flows from operating activities:
Cash received from customers $ 5,500
Deduct cash payments for expenses 2,900
Net cash flow from operating activities $ 2,600
Cash flows from investing activities:
Cash payments for acquisition of land (12,000)
Cash flows from financing activities:
Cash received from sale of capital stock $ 6,000
Cash received from notes payable 10,000 $16,000
Deduct cash dividends 1,500
Net cash flow from financing activities 14,500
Net increase in cash $ 5,100
September 1, 2007, cash balance 0
September 30, 2007, cash balance $ 5,100
Balance Sheet
The amounts of Family Health Care’s assets, liabilities, and stockholders’ equity as of September 30 appear on the last line of the balance sheet columns of Exhibit 2. The bal- ance sheet is prepared as shown in Exhibit 4.
In the liabilities section of Family Health Care’s balance sheet, notes payable is the only liability. When there are two or more categories of liabilities, each should be listed and the total amount of liabilities reported. Liabilities should be presented in the or- der that they will be paid in cash. Thus, the notes payable due in 2012 will be listed after the obligations that are due in shorter time periods.
For Family Health Care, the September 30, 2007, stockholders’ equity consists of
$6,000 of capital stock and retained earnings of $1,100. The retained earnings amount is also reported on the retained earnings statement.
Statement of Cash Flows
Family Health Care’s statement of cash flows for September is prepared from the state- ment of cash flows column of Exhibit 2. Cash increased from a zero balance at the be- ginning of the month to $5,100 at the end of the month. This $5,100 increase in cash was a result of cash flows from operating activities of $2,600.
In addition to cash inflows of $2,600 from operating activities, Family Health Care spent $12,000 of cash for investing activities involving the purchase of land. This cash out- flow related to investing activities was financed by an increased investment of $6,000 by Dr. Landry and $10,000 borrowed through a note payable at First National Bank. Family Health Care also distributed $1,500 in cash dividends during September.
Integration of Financial Statements
Exhibit 5 shows the integration of Family Health Care’s financial statements for September. The ending cash balance of $5,100 on the balance sheet equals the ending cash balance reported on the statement of cash flows. The net income of $2,600 is re- ported on the income statement and the retained earnings statement. The ending re- tained earnings of $1,100 is reported in the retained earnings statement and the balance sheet. The cash flows from operating activities of $2,600 reported on the statement of cash flows equals the net income on the income statement. However, as we illustrate and explain in the next chapter, while cash flows from operating activities and net in- come are related they are normally not equal.
Q. At January 1, 2007, total assets and total liabil- ities were $600,000 and
$380,000, respectively. At December 31, 2007, total assets and total liabilities were $950,000 and
$580,000, respectively. If dividends of $75,000 were paid in 2007, what was the net income or loss?
A. $225,000 [($950,000ⴚ
$580,000)ⴚ($600,000ⴚ
$380,000)ⴙ$75,000]