Exercise

If the liabilities of a company increased $92,000 during a period of time and equity in the
business decreased $30,000 during the same period, did the assets of the company increase or
decrease? By what amount?

Ans:

$62,000 = $92,000 - $30,000

Assets = Liabilities + Equity

Exercise
The accounts of Garfield Company with the increases or decreases that occurred during the past
year are as follows:

Except for net income, an investment of $3,000 by the owner, and a withdrawal of $11,000 by
the owner, no other items affected the owner's capital account. Using the balance sheet equation,
compute net income for the past year.

Ans:

Total Increase in assets = 20,000

Total Increase in liabilities = 5,000

So, Increase in owner’s equity = 20,000 – 5,000 = 15,000

Capital + net income- withdrawal = Change in owner’s equity.

3000 + Net Income – 11,000 = 15,000.
Net Income = 15,000 + 11,000 – 3,000 = 23,000.
Exercise
Annie's Attic has the following account balances for the dates given:

Also, its net income, for September 1 through September 30 was $20,000 and there were no
investments or withdrawals by the owner. Determine the equity at both September 1 and
September 30.

ANS:

At September 1

Equity = $74,000
80,000 = 6,000 + Equity
Assets = Liabilities + Equity

Accounts payable at September 30: 98000 = 4000 + 94000

Assets = Liabilities + Equity
Exercise
Fast Forward has the following beginning cash balance and cash transactions for the month of
January. Using this information prepare a statement of cash flows.

ANS:
Exercise

Ans:
a) Make payment of previously due amount.

b) Collect account receivables.

c) Equipment purchased on credit.

d) Service provided for cash / Owner’s made additional investment

e) Services provided on credit.

Exercise
One item is omitted in each of the following summaries of balance sheet and income statement
data for three different sole proprietorships, X, Y, and Z. Determine the amounts of the missing
items, identifying each proprietorship by letter.
Proprietorship
X Y Z
Beginning of the Year:
Assets $460,000 $180,000 $189,000
Liabilities 250,000 105,000 168,000
End of the Year:
Assets 480,000 225,000 195,000
Liabilities 280,000 95,000 169,000
During the Year:
Additional Investment by the owner ? 79,000 80,000

Withdrawals by the owner 90,000 83,000 ?

Revenue 195,000 ? 187,000
Expenses 160,000 113,000 185,000

Solution
Proprietorship X ($45,000)
Beginning Capital balance ($460,000 – $250,000) $210,000
Additional investments ($290,000 – $210,000 – $35,000) 45,000
Net income for year ($195,000 – $160,000) 35,000
290,000
Less withdrawals 90,000
Ending Capital balance ($480,000 – $280,000) $200,000

Proprietorship Y ($172,000)
Beginning Capital balance ($180,000 – $105,000) $ 75,000
Additional investments 79,000
Net income for year 59,000
[Revenues = $172,000 ($113,000 + $59,000)] 213,000
Less withdrawals 83,000
Ending Capital balance ($225,000 – $95,000) $130,000

Proprietorship Z ($77,000)
Beginning Capital balance ($189,000 – $168,000) $ 21,000
Additional investments 80,000
Net income for year ($187,000 – $185,000) 2,000
103,000
Less withdrawals ($103,000 – $26,000) 77,000
Ending Capital balance ($195,000 – $169,000) $ 26,000
Exercise

The following transactions represent part of the activities of Lyon Company for the first month
of its existence. Indicate the effect of each transaction upon the total assets of the business by
one of the following phrases: increased total assets, decreased total assets, or no change in total
assets.
(a) The owner invested cash to start the business.
(b) Purchased a computer for cash.
(c) Purchased office equipment with money borrowed from the bank.
(d) Paid the first month's utility bill.
(e) Collected an accounts receivable.
(f) Owner withdrew cash from the business.

Solution
(a) Increased total assets.
(b) No change in total assets.
(c) Increased total assets.
(d) Decreased total assets.
(e) No change in total assets.
(f) Decreased total assets.

Exercise

Prepare an income statement, an owner's equity statement, and a balance sheet for the dental
practice of Carl Craft, DDS, from the items listed below for the month of September.

Carl Craft, Capital, September 1 $40,000

Accounts payable 7,000
Equipment 30,000
Service revenue 24,000
Carl Craft, Drawings 5,000
Dental supplies expense 3,500
Cash 6,000
Utilities expense 700
Dental supplies 2,800
Salaries expense 7,000
Accounts receivable 14,000
Rent expense 2,000
Solution
CARL CRAFT, DDS
Income Statement
For the Month Ended September 30, 2002

Revenues
Service revenue $24,000
Expenses
Salaries expense $7,000
Dental supplies expense 3,500
Rent expense 2,000
Utilities expense 700
Total expenses 13,200
Net income $10,800

CARL CRAFT, DDS

Owner's Equity Statement
For the Month Ended September 30, 2002

Carl Craft, Capital, September 1 $40,000

Add: Net income 10,800
50,800
Less: Drawings 5,000
Carl Craft, Capital, September 30 $45,800

CARL CRAFT, DDS

Balance Sheet
September 30, 2002

Assets
Cash $ 6,000
Accounts receivable 14,000
Dental supplies 2,800
Equipment 30,000
Total assets $52,800

Liabilities and Owner's Equity

Liabilities
Accounts payable $ 7,000
Owner's Equity
Carl Craft, Capital 45,800
Total liabilities and owner's equity $52,800
Ex
At the beginning of the year, a company had $120,000 worth of liabilities. During the year,
assets increased by $160,000 and at year-end they equaled $360,000. Liabilities decreased
$20,000 during the year. Calculate the beginning and ending values of equity.

Beginning Assets= 360,000- 160,000 = 200,000

Beginning Owner’s equity = Assets – Liabilities = 200,000 – 120,000 = 80,000.
Ending Owner’s equity = 360,000 – (120,000-20,000) = 260,000.

Ex
At the beginning of the year, Yates Company had total assets of $550,000 and total
liabilities of $200,000. Answer the following questions viewing each situation as being
independent of the others.
(1) If total assets increased $200,000 during the year, and total liabilities decreased
$75,000, what is the amount of owner's equity at the end of the year?
(2) During the year, total liabilities increased $230,000 and owner's equity decreased
$90,000. What is the amount of total assets at the end of the year?
(3) If total assets decreased $40,000 and owner's equity increased $130,000 during the
year, what is the amount of total liabilities at the end of the year?
Ex
Graham Roofing Company, owned by R. Graham, began operations in May and completed the
following transactions during that first month of operations. Show the effects of the transactions
on the accounts of the accounting equation by recording increases and decreases in the
appropriate columns in the table below. Do not determine new account balances after each
transaction. Determine the final total for each account and verify that the equation is in balance.