Financial statement information about four different compani

Financial statement information about four different companies is as follows.

Instructions
(a) Determine the missing amounts.
(b) Prepare the retained earnings statement for Stills Company. Assume beginning retained earnings was $20,000.
(c) Write a memorandum explaining the sequence for preparing financial statements and the interrelationship of the retained earnings statement to the income statement and balancesheet.          

Solution

1. Calculation of missing amounts:

(a) Stockholders\' equity = Assets - Liabilities = 75,000 - 50,000 = 25,000

(b) Assets = Stockholders\' equity + Liabilities = 40,000 + 55,000 = 95,000

(c) Dividends will reduce the stockholders\' equity while additional investment will increase it.

Total profit = Total revenue - Total expenses

Additional Investment = Closing Stockholders\' equity + Dividends - Opening stockholders\' equity - Profit

= 40,000 + 10,000 - 25,000 - 20,000 = 5,000

(d) Liabilities = Assets - Stockholders\' Equity = 110,000 - 60,000 = 50,000

(e) Stockholders\' equity = Assets - Liabilities = 137,000 - 75,000 = 62,000

(f) Dividends = Opening stockholders\' equity + Additional investment + Profit - Closing Stockholders\' equity

= 60,000 + 15,000 +35,000 - 62,000 = 48,000

(g) Assets = Liabilities + Stockholders\' equity = 75,000 + 45,000 = 120,000

(h) Liabilities = Assets - Stockholders\' equity = 200,000 - 130,000 = 70,000

(i) Profit = Closing Stockholders\' Equity + Dividends - Opening Stockholders\' equity - Additional Investment

= 130,000 + 14,000 - 45,000 -10,000 = 89,000

Total Revenue = Total expenses + Profit = 342,000 + 89,000 = 431,000

(j) Liabilities = Assets - Stockholders\' equity = 150,000 - 100,000 = 50,000

(k) Assets = Liabilities + Stockholders\' equity = 80,000 + 140,000 = 220,000

(l) Profit = Closing stockholders\' equity + Dividends - Opening Stockholders\' equity - Additional Investment

= 140,000 + 10,000 - 100,000 - 15,000 = 35,000

Total expenses = Total revenue - Profit = 500,000 - 35,000 = 465,000

2. Retained earnings statement of Stills Company:

3. Financial statements show the overall performance of the company over a given time period. Such statements determine the overall profitability and financial position of the company. These statements help the business and all its stakeholders assess the position of the company and take decisions accordingly. For this it is necessary that financial statements are prepared in a sequence because the information in one is needed in the next. The sequence of financial statements is : Income Statement, retained Earnings statement, Balance sheet and then statement of cash flows. The Profit figure arrived at in the income statement is used in the retained earnings statement which is further used in the balance sheet and finally cash flow statement is prepared to assess the cash flows from operating, investing and financing activities. Retained earnings statement is a link between income statement and balance sheet.