Question

The adjusted trial balance for Sunland Company is given below:

Prepare the income statement for the year ended August 31.

Prepare the retained earnings statements for the year ended August 31. (List items that increase retained earnings first.)

Prepare the classified balance sheet at August 31. (List Current Assets in order of liquidity.)

Answer 1

Concepts and reason

Income statement:

The income statement helps to know the after-tax income of a company. It helps to know whether there is profit or loss during a period and indicates about the performance of the company.

There is reporting of expenses and revenues in the income statement of the company which help in the determination of the net income or loss during the period.

Statement of Retained earnings:

In the statement of retained earnings the net income or loss is for the current period is added to the opening balance of retained earnings. Dividend payment to the common stock holders is deducted in the statement of retained earnings. After making the above adjustments to the opening balance of retained earnings the balance obtained at the end is the closing balance of the retained earnings.

Balance Sheet:

Balance sheet is prepared to forecast the assets, liabilities and stockholders’ equity of a company for a period of time. It is prepared to estimate the financial position of the company.

The asset side of balance sheet includes current assets and fixed assets. The liability side of the balance sheet includes current liabilities, long-term liabilities and equity.

Fundamentals

Net Income:

Gross Profit is the profit which a company earns after reducing the costs that are related to the production and sell of its products. Gross profit is computed by deducting the cost of goods sold from sales revenue. The net income or net loss is computed by deducting the operating expenses from the gross profit. Net income is considered as of most importance by the investors in financial statements of any year. The reason being the net income represents the increase in the investors’ wealth resulting from the profitable activities performed by the company.

Retained Earnings:

Retained earnings are part of the earnings of the company which are not paid as dividend to the shareholders of the company. These earnings are kept aside by the company for the repayment of its debts, investment purposes and meeting out uncertainties.

Property, plant and equipment are tangible assets that have physical substance. For example: Equipments, Machinery, and Buildings etc. The plant assets are long lived assets as the useful life of the assets is more than one year.

The current assets are shown in the balance sheet of the company. The assets which in a year is expected to be turned into cash are the current assets. Such assets include cash, inventory, accounts receivable, prepaid expenses etc.

The current liabilities are shown in the balance sheet of the company. The liabilities which are to be paid by the company in one year cash are the current liabilities. Such liabilities include salaries payable, interest payable, accounts payable, short term debt etc.

The long-term liabilities are shown in the balance sheet of the company. The liabilities which are to be paid by the company after one year are the long-term liabilities. Such liabilities include debentures, bonds payable etc.

The shareholders’ equity section of balance sheet presents the amount of the total stockholders’ equity when the balance sheet is prepared. In the stockholders’ equity section of the balance sheet the total stockholders’ equity is computed by adding the capital stock, additional paid in capital and retained earnings.

Prepare the income statement for the year ended August 31.

Following schedule shows the income statement for the year ended August 31:

The net income of the company is $10,356.

Following schedule shows the calculation:

Prepare the statement of retained earnings of the company.

Following schedule statement of retained earnings:

The balance of retained earnings on August 31, 2017 is $13,476.

Following schedule shows the calculation:

Prepare the classified balance sheet at August 31.

Following schedule classified balance sheet of the company:

The total assets of the company are $35,176 and total liabilities and equity is $35,176.

Following schedule shows the calculation:

Ans:

The net income of the company is $10,356.

The balance of retained earnings on August 31, 2017 is $13,476.

The total assets of the company are $35,176 and total liabilities and equity is $35,176.