Compute the missing amounts in the following table. ( at the end of 2007, retain

Question

Compute the missing amounts in the following table. ( at the end of 2007, retained earnings had a balance of negative $2086) Comment on the company's performance over the three year period after calculating the relationship of expenses as a percentage of revenues and net income as a percentage of revenues. Do you agree with the company's dividend policy? Why?

2006 2007. 2008

Retained earning ( beginning).........................$1746.5). $5327.0. $2653.0

Revenues...........................................................4840.5. 5327.0. ?

Expenses.............................................................? 5628.0 5425.0

Dividends..............................................................-0- ? 17.5

Explanation / Answer

he income statement for the calendar year 2011 will explain a portion of the change in the owner%u2019s equity between the balance sheets of December 31, 2010 and December 31, 2011. The other items that account for the change in owner%u2019s equity are the owner%u2019s investments into the sole proprietorship and the owner%u2019s draws (or withdrawals). A recap of these changes is the statement of changes in owner%u2019s equity. Here is a statement of changes in owner%u2019s equity for the year 2011 assuming that the Accounting Software Co. had only the eight transactions that we covered earlier.

Example of Calculating a Missing Amount

The format of the statement of changes in owner%u2019s equity can be used to determine one of these components if it is unknown. For example, if the net income for the year 2011 is unknown, but you know the amount of the draws and the beginning and ending balances of owner%u2019s equity, you can calculate the net income. (This might be necessary if a company does not have complete records of its revenues and expenses.) Let%u2019s demonstrate this by using the following amounts.

Step 1.

The owner%u2019s equity at December 31, 2010 can be computed using the accounting equation:

Step 2.

The owner%u2019s equity at December 31, 2011 can be computed as well:

Step 3.

Insert into the statement of changes in owner%u2019s equity the information that was given and the amounts calculated in Step 1 and Step 2:

Step 4.

The %u201CSubtotal%u201D can be calculated by adding the last two numbers on the statement: $94,000 + $40,000 = $134,000. After this calculation we have:

Step 5.

Starting at the top of the statement we know that the owner%u2019s equity before the start of 2011 was $60,000 and in 2011 the owner invested an additional $10,000. As a result we have $70,000 before considering the amount of Net Income. We also know that after the amount of Net Income is added, the Subtotal has to be $134,000 (the Subtotal calculated in Step 4). The Net Income is the difference between $70,000 and $134,000. Net income must have been $64,000.

Step 6.

Insert the previously missing amount (in this case it is the $64,000 of net income) into the statement of changes in owner%u2019s equity and recheck the math:

Since the statement is mathematically correct, we are confident that the net income was $64,000.

Accounting Software Co. Statement of Changes in Owner%u2019s Equity For the Year Ended December 31, 2011 Owner%u2019s equity at December 31, 2010 $ 0 Add: Owner%u2019s investment 10,000         Net income 180                Subtotal 10,180 Deduct: Owner%u2019s draws 100 Owner%u2019s equity at December 31, 2011 $ 10,080

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