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# Preparing Financial Statements; The Accounting Equation

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O'Shea Enterprises started the 2002 accounting period with \$30,000 of assets (all cash), \$18,000 of liabilities, and \$4,000 of common stock. During the year, O'Shea earned cash revenues of \$48,000, paid cash expenses of \$32,000, and paid a cash dividend to stockholders of \$2,000. O'Shea also acquired cash from the sale of common stock and paid \$6,000 cash to reduce the liability owed to a bank. (Check figures: a. Net Income:\$16,000, b. Total Assets: \$48,000)
a. Prepare an income statement, statement of changes in stockholders' equity, period-end balance sheet, and statement cash flows for the 2002 accounting period. (Hint: Determine the amount of beginning retained earnings before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)
b. Determine the percentage of total assets that were provided by creditors, investors, and earnings.

#### Solution Preview

O'Shea's beginning retained earnings may be determined using two formulas:
1. Assets=Liabilities+Stockholders' Equity. In this case, \$30,000=\$18,000+X, or Stockholders' Equity=\$12,000.
2. Stockholders' Equity=Stock Outstanding+/-Paid-In Capital+/-Retained Earnings-Treasury Stock. In this case, \$12,000=\$4,000+X, so beginning Retained Earnings=\$8,000.

a. Cash is the only asset. The problem tells us it starts 2002 at \$30,000. The company earns a net income of \$16,000 (\$48,000 in sales less \$32,000 in expenses), pays a cash dividend of \$2,000 and pays debt of \$6,000. If the stock were not issued, the ending cash balance would be (\$30,000+\$48,000-\$32,000-\$2,000-\$6,000), or \$38,000. However, you are told the ending assets (all cash) are \$48,000, so the company must have sold \$10,000 in stock.

O'Shea Enterprises
Income Statement
For The Year Ended December 31, 2002

Sales ...

#### Solution Summary

This solution starts by determining the beginning stockholders' equity balance using the Accounting Equation. Using facts given, it illustrates the preparation of the income statement, statement of changes in stockholders' equity, period-end balance sheet, and statement cash flows.

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