The stockholders’ equity at the beginning of the period was $200,000; at the end of the period, assets were $255,000 and liabilities were $40,000.
If the owner made no additional investments or paid no dividends during the period, did the business incur a net income or a net loss for the period and how much?
To determine whether the business incurred a net income or a net loss for the period, we need to calculate the change in stockholders' equity.
Stockholders' equity represents the net worth of a company and is calculated as the difference between assets and liabilities. The formula for stockholders' equity is:
Stockholders' Equity = Assets - Liabilities
Given that the stockholders' equity at the beginning of the period was $200,000 and the liabilities at the end of the period were $40,000, we can calculate the change in stockholders' equity.
Change in Stockholders' Equity = Stockholders' Equity at the end of the period - Stockholders' Equity at the beginning of the period
= Assets - Liabilities - Stockholders' Equity at the beginning of the period
= $255,000 - $40,000 - $200,000.
Now, let's compute the change in stockholders' equity:
Change in Stockholders' Equity = $15,000
If the change in stockholders' equity is positive, it means the business had net income. If it is negative, it means the business had a net loss.
In this case, since the change in stockholders' equity is positive, the business incurred a net income for the period. The amount of net income can be determined by calculating the absolute value of the change in stockholders' equity, which is $15,000.