initial investment in the company of $26,200 cash. Here are the assets and liabilities for the month of June, its first month of operation.
Cash $4,600.00
Accounts receivable $4,000.00
Revenue $7,000.00
Supplies $2,400.00
Advertising expense $400.00
Equipment $29,000.00
Notes Payable $12,000.00
Accounts payable $500.00
Supplies expense $1,000.00
Gas and oil expense $600.00
Utilities expense $300.00
Wage expense $1,400.00
In June, the company issued no additional stock, but paid dividends of $2000.
a. Prepare a income statement and a retained earnings for the month of June and a balance sheet at June 30, 2010.
b. Briefly discuss whether the company's first month of operations was a success.
c. Discuss the company's decision to distribute a dividend.
Revenues
revenue
$7,000.00
Total revenue
$7,000.00
Expenses
Supplies expense $1,000.00
Gas and oil expense
$600.00
Utilities expense
$300.00
Wage expense
$1,400.00
Advertising expense $400.00
Total expenses $3,700.00
Net income $3,300.00
Retained earnings statement
R/E as of 6/30/2010 $-
Net Income $3,300.00
Dividends paid during 2010 $2,000.00
$1,300.00
b. the company's first month of operation was a success because they made $1,300.00 in June.
c.
To prepare the income statement, we need to calculate the total revenues and expenses for the month of June.
1. Total Revenues:
Total revenues can be calculated by adding up all the revenue amounts for the month. In this case, the revenue is given as $7,000.
2. Total Expenses:
Total expenses can be calculated by adding up all the expense amounts for the month. In this case, the expenses are:
- Advertising expense: $400
- Supplies expense: $1,000
- Gas and oil expense: $600
- Utilities expense: $300
- Wage expense: $1,400
Total expenses = $400 + $1,000 + $600 + $300 + $1,400 = $3,700
3. Net Income:
Net income can be calculated by subtracting total expenses from total revenues.
Net Income = Total revenues - Total expenses = $7,000 - $3,700 = $3,300
The income statement for the month of June is as follows:
Revenue: $7,000
Expenses:
- Advertising expense: $400
- Supplies expense: $1,000
- Gas and oil expense: $600
- Utilities expense: $300
- Wage expense: $1,400
Total expenses: $3,700
Net Income: $3,300
To calculate retained earnings, we need to consider the initial investment, net income, and dividends paid.
1. Retained Earnings:
Retained Earnings = Initial Investment + Net Income - Dividends Paid
Initial Investment: $26,200
Net Income: $3,300
Dividends Paid: $2,000
Retained Earnings = $26,200 + $3,300 - $2,000 = $27,500
Now, let's move on to preparing the balance sheet for June 30, 2010:
Assets:
- Cash: $4,600
- Accounts receivable: $4,000
- Supplies: $2,400
- Equipment: $29,000
Total Assets: $40,000
Liabilities:
- Notes Payable: $12,000
- Accounts payable: $500
Total Liabilities: $12,500
Equity:
- Initial Investment: $26,200
- Retained Earnings: $27,500
Total Equity: $53,700
The balance sheet as of June 30, 2010, would look like this:
Assets:
Cash: $4,600
Accounts receivable: $4,000
Supplies: $2,400
Equipment: $29,000
Total Assets: $40,000
Liabilities:
Notes Payable: $12,000
Accounts payable: $500
Total Liabilities: $12,500
Equity:
Initial Investment: $26,200
Retained Earnings: $27,500
Total Equity: $53,700
Now let's discuss the questions:
b. To determine whether the company's first month of operations was a success, we need to consider the net income. In this case, the net income for June was $3,300. If the net income is positive, it indicates that the company generated more revenues than expenses and made a profit. Therefore, based on the positive net income, we can conclude that the company's first month of operations was a success.
c. The company's decision to distribute a dividend of $2,000 indicates that the company had excess funds available after covering its expenses and retaining some earnings. The management may have chosen to distribute a dividend as a way to reward shareholders or provide them with a return on their investment. Dividends are usually paid out of retained earnings. In this case, the dividend payment has reduced the retained earnings to $27,500.