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Financial Statements for Heidi's Bakery Inc.

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Problem 1-7A Corrected Financial Statements

Heidi's Bakery Inc. operates a small pastry business. The company has always maintained a complete and accurate set of records. Unfortunately, the company's accountant left in a dispute with the president and took the 2008 financial statements with her. The following balance sheet and income statement were prepared by the company's president:

Heidi's Bakery Inc.
Income Statement
For the Year Ended December 31, 2008

Accounts receivable $15,500
Pastry revenue-cash sales 23,700 $39,200

Dividends $ 5,600
Accounts payable 6,800
Utilities 9,500
Salaries and wages 18,200 $40,100
Net loss $ (900)

Heidi's Bakery Inc.
Balance Sheet
December 31, 2008

Assets Liabilities and Stockholder's Equity
Cash $ 3,700 Pastry revenue-
Building and equipment 60,000 credit sales $ 22,100
Less: Notes payable (40,000) Capital stock 30,000
Land 50,000 Net loss (900)
Retained earnings 22,500

Total assets $73,700 Total liabilities and
stockholders' equity $73,700

The president is very disappointed with the net loss for the year because net income has averaged $21,000 over the last 10 years. He has asked for your help in determining whether the reported net loss accurately reflects the profitability of the company and whether the balance sheet is prepared correctly.

1. Prepare a corrected income statement for the year ended December 31, 2008.
2. Prepare a statement of retained earnings for the year ended December 31, 2008. (The actual amount of retained earnings on January 1, 2008, was $39,900. The December 31, 2008, retained earnings balance shown is incorrect. The president simply "plugged in" this amount to make the balance sheet balance.)
3. Prepare a corrected balance sheet at December 31, 2008.
4. What are the major differences between the income statement he prepared and the correct statement?


Solution Summary

Response discusses Financial Statements for Heidi's Bakery Inc.