Financial Accounting: An Integrated Statements Approach, 2nd Edition

218 Chapter 5 Accounting for Merchandise Operations

Exhibit 6

Retained Earnings

Statement

Online Solutions

Retained Earnings Statement

For the Year Ended December 31, 2010

Retained earnings, January 1, 2010 $128,800

Net income for the year $60,400

Less dividends 18,000

Increase in retained earnings 42,400

Retained earnings, December 31, 2010 $171,200

Balance Sheet

As we discussed and illustrated in previous chapters, the balance sheet may be pre-

sented in a downward sequence in three sections, beginning with the assets. This form

of balance sheet is called the report form.^4 The 2010 balance sheet for Online Solutions

is shown in Exhibit 7. In this balance sheet, note that merchandise inventory at the end

of the period is reported as a current asset and that the current portion of the note

payable is $5,000.

Statement of Cash Flows

The statement of cash flows for Online Solutions is shown in Exhibit 8. It indicates that

cash increased during 2010 by $11,450. This increase is generated from a positive cash

flow from operating activities of $47,120, which is partially offset by negative cash

flows from investing and financing activities of $12,670 and $23,000, respectively.

Finally, you should note that the December 31, 2010, cash balance reported on the

statement of cash flows agrees with the amount reported for cash on the December 31,

2010, balance sheet shown in Exhibit 7.

Integration of Financial Statements

Exhibit 9 (on page 220) shows the integration of Online Solutions’ financial statements.

The preparation of the “cash flows from operating activities” section of the statement

of cash flows shown in Exhibit 8 is discussed and illustrated in the appendix at the end

of this chapter. This discussion includes the reconciliation of net income and net cash

flows from operations.

4 The balance sheet may also be presented in an account form, with assets on the left-hand side and the

liabilities and stockholders’ equity on the right-hand side.

The single-step form emphasizes total revenues and total expenses as the factors

that determine net income. A criticism of the single-step form is that such amounts as

gross profit and income from operations are not readily available for analysis.

Retained Earnings Statement

The retained earnings statement for Online Solutions is shown in Exhibit 6. This

statement is prepared in the same manner that we described previously for a service

business.