# Preparing an Income Statement, Retained Earnings Statement, and Balance Sheet Purpose of Assignment The purpose of this assignment is to help students become familiar with the presentation of the income statement and the retained earnings statement, including how parts of the financial statement is evaluated to determine the operational success of the business. Assignment Steps Resources: Financial Accounting: Tools for Business Decision Making, p. 36 Scenario: On June 1, 2017, Elite Service Co. was started with an initial investment in the company of \$22,100 cash. Below are the assets, liabilities, and common stock of the company June 30, 2017, and the revenues and expenses for the month of June, its first month of operations: Cash \$ 4,600 Notes payable \$12,000 Accounts receivable 4,000 Accounts payable 500 Service revenue 7,500 Supplies expense 1,000 Supplies 2,400 Maintenance and repairs expense 600 Advertising expense 400 Utilities expense 300 Equipment 26,000 Salaries and wages expense 1,400 Common stock 22,100 In June, the company issues no additional stock but paid dividends of \$1,400. Prepare an income statement, retained earnings statement, and balance sheet analyzing your findings using the questions below, in a total of 1,050 words: Briefly address whether the company’s first month of operations was a success. Discuss the company’s decision to distribute a dividend. Use the Excel® spreadsheet to show your work and submit it with your analysis.

ELITE SERVICE CO FINANCIAL STATEMENTS

Name

University

Elite Service Co Financial Statements

In regard to the balance sheet of Elite Service Company, the firm had a positive growth in the month of June and in this case, the total assets were \$44,500 while its total liabilities were \$17,600 and on the other hand, its common stock was \$22,100. The sum of liabilities and stockholders’ equity was \$39,700. The most notable within this balance sheet is that the company has more assets than its liabilities which are one indication that the business had a good startup and having more assets than liabilities is a guarantee to the company that it can hardly suffer bankruptcy or lack of cash to pay back is short-term obligations. Basically, also most all financial problems within companies are traced back to the foundation of a weak balance sheet that becomes unmanageable due to having excess debt. For instance, many organizations accumulate debts during their good times of operation without knowing that when business will come down, there will be a low cash inflow that will lead to devaluation of the assets and mostly having excess inventory and fixed assets that cannot be used to pay back both the long-term and short term obligation (Delen, Kuzey & Uyar, 2013). Therefore, having a strong balance sheet is essentially important for the survival of the business when thing turn out to be worst in the market.  However, in order to determine a healthy balance sheet that will show if the company had effective operation for the month ending June, various factors should be considered and these include; calculation of current ratio, quick ratio, cash ratio, working capitals, debt ratio and debt to equity ratio.

All these factor and especially the ratios which are known as leverage ratios are key indicators that depicts how much cash comes into the company as debt and thus, in case of having higher leverage ratio it would mean that the company is using a lot of debt to finance its operation  which is considered very risky for the business. But in this case for the company has fewer liabilities considered to its assets and there are no evidences that the company has a debt which also affect the profitability of the company. In general, a well performing company is considered to have a strong balance sheet which must have more total assets than total liabilities; this also applies to having more current assets than current liabilities which implies that the firm does depend on external factors to covers up its obligations.

Income statement

Income statement reveals much more in regard to the amount of money the company generates. In this case, according to Zager & Zager (2003), “the income statement is significant since it provides information into how effective the firm is controlling its expenses especially the amount of interest income as well as other operation expenses and the taxes that are paid to the authorities.”  The income statement can be used to establish the rate of return the company is earning the retained earnings of the shareholders and this can be achieved by considering the financial rations of the company and the profit margin rations such as net profit margin, gross profit margin as well as operating profit margin ratio (Delen, Kuzey & Uyar, 2013). With the income statement, it will be easier for the company to determine its profitability ratios that would help to measure the efficiency with which the business uses to turn the business activity into profits. In this regard, Elite Service Company recorded totals   sales of \$13,900 while its totals expenses amounted to \$5,600 and this resulted to a net income of \$8,300 within the moth of June. Another notable consideration as to why this company has effective operation in these month of June is that it was able to generate more net income than its expenses and this means that the company managed to use its assets effectively to generate sales and having low exposes is a good approach that the company used to ensure that it gets more out of the little expenses incurred. Cutting down expenses for many companies is considered the only alternative to counter the risk of borrowing since the higher the expenses the more possibilities of involving in borrowing which would then increase the liabilities hence making the company struggled to pay back its obligation both in the short run and long run.

Finally, in regard to  retained earnings statement, it is used to depict a periods profits dived between dividends for shareholders as well as retained earning that are retained on the balance sheet in order to accumulate under the stock owners equity. This statement is also used to demonstrate what the business did with its generated profits since it represents the amount of profit the business has reinvested after its inception. In this case, the company’s ending retained earnings for the month of June was \$29,000 and since the company’s liabilities were \$17,000, having retained earnings that is more than the company’s total liabilities is a great advantage to the company due to the fact that the company will not be able struggle looking for money or other current assets to liquidate in order to pay back its short term and long term obligations.

Therefore, since the retained earnings are in surplus, then it will b easier for the company to either consider re-investing the earning back to the business by increasing inventory or other assets. However, in case the business encounter financial crisis due to external factors of the economy then the retained earnings will be used to pay back the liabilities. In conclusion, Elite Service company had a successful operation in the month of June in regard to the high sales the company recorded, its net income, high total assets and ending retained earnings that guarantee the company safe operation even if there will be any low sales in the following month.

References

Delen, D., Kuzey, C & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach.

Zager, K. & Zager, L. (2003). The Role of Financial Information in Decision Making Process. Innovative Marketing, 2 (3)

Appendix I

 Balance Sheet Assets Cash \$4,600 Accounts receivable 4,000 Service revenue 7,500 Supplies 2,400 Equipment 26,000 Total Assets \$44,500 Liabilities Notes payable \$12,000 Accounts payable 500 Supplies expense 1,000 Advertising expense 400 Maintenance and repairs expense 600 Utilities expense 300 Dividends payable 1400 Salaries and wages expense 1,400 Total Liabilities \$17,600 Stockholders’ Equity Common stock 22,100 Total Stockholders’ Equity \$      22,100 Total Stockholders’ Equity and Liabilities \$          39,700

AppendixII

 Income Statement Revenues Accounts receivable 4,000 Service revenue 7,500 Supplies 2,400 Total Revenue \$  13,900.00 Expenses Salaries and wages expense 1,400 Dividends payable 1400 Utilities expense 300 Maintenance and repairs expense 600 Advertising expense 400 Supplies expense 1,000 Accounts payable 500 Total Expenses \$    5,600.00 Net income \$    8,300.00

Appendix II

 Retained Earnings Statement Beginning Retained Earnings 22100 Net Income \$    8,300.00 Total \$  30,400.00 Dividends paid on Common stock 1400 Total Dividends deducted 1400 Ending Balance retained earnings \$  29,000.00