Financial Accounting: An Integrated Statements Approach, 2nd Edition

added to (subtracted from) the beginning cash balance to equal the ending cash bal-

ance. This ending cash balance will appear in both the statement of cash flows and

balance sheet.

7.The stockholders’ equity is increased by amounts invested by stockholders (capi-

tal stock).

8.Revenues increase stockholders’ equity (retained earnings) and expenses

decrease stockholders’ equity (retained earnings). The effects of revenue and ex-

pense transactions are also shown in the income statement column.

9.Stockholders’ equity (retained earnings) is decreased by dividends distributed to

stockholders.

10.The change in retained earnings for the period is the net income minus dividends.

For a net loss, the change in retained earnings is the net loss plus dividends.

11.The statement of cash flows is linked to the balance sheet through cash (an asset).

12.The income statement is linked to the balance sheet through revenues and ex-

penses (net income or loss), which affects retained earnings.

Exhibit 3 summarizes the effects of the various transactions affecting stockholders’

equity.

62 Chapter 2 Basic Accounting Concepts

STOCKHOLDERS’ EQUITY

Exhibit 3

Effects of Transactions

on Stockholders’ Equity

FINANCIAL STATEMENTS FOR A CORPORATION’S

FIRST PERIOD OF OPERATIONS

In Exhibit 2, the September transactions for Family Health Care are listed in the order that

they occurred. This exhibit, however, is not very user-friendly in that it does notgroup

and summarize like transactions together. As we described and illustrated in Chapter 1,

the accounting reports that provide this summarized information are financial

Prepare financial state-

ments for a corporation’s

first period of operations.

3