The income statement is normally prepared first using the income statement col-
umn of Exhibit 2. The income statement is prepared first because the net income or loss
is needed to prepare the retained earnings statement. The retained earnings statement
is prepared next because the ending balance of retained earnings is needed for prepar-
ing the balance sheet. The retained earnings statement is prepared using the income
statement and the amount recorded for dividends for the period. The balance sheet is
prepared next using the balances as of September 30 shown in Exhibit 2. The statement
of cash flows is normally prepared last using the statement of cash flows column of
Exhibit 2. You should note that each financial statement is identified by the name of
the business, the title of the statement, and the date or period of time.Income Statement
As shown in Exhibit 4, the income statement for Family Health Care reports fees
earned of $5,500, total operating expenses of $2,900, and net income of $2,600. The
$5,500 of fees earned was taken from the income statement column of Exhibit 2.
Likewise, the expenses were summarized from the income statement column of
Exhibit 2 and reported under the heading “Operating expenses.” The expenses were
listed in order of size, beginning with the largest expense. Miscellaneous expense is
usually shown as the last item, regardless of the amount. The total operating expenses
were then subtracted from the fees earned to arrive at the net income of $2,600. The
effect of this net income will be to increase retained earnings and stockholders’ equity.Retained Earnings Statement
Since Family Health Care has been in operation for only one month, it has no retained
earnings at the beginning of September. The ending September balance is the change
in retained earnings that results from net income and dividends. This change, $1,100,
will be the beginning retained earnings balance for October.64 Chapter 2 Basic Accounting Concepts
Exhibit 4
ConcludedFamily Health Care, P.C.
Statement of Cash Flows
For the Month Ended September 30, 2007Cash flows from operating activities:
Cash received from customers $ 5,500
Deduct cash payments for expenses 2,900
Net cash flow from operating activities $ 2,600
Cash flows from investing activities:
Cash payments for acquisition of land (12,000)
Cash flows from financing activities:
Cash received from sale of capital stock $ 6,000
Cash received from notes payable 10,000 $16,000
Deduct cash dividends 1,500
Net cash flow from financing activities 14,500
Net increase in cash $ 5,100
September 1, 2007, cash balance 0
September 30, 2007, cash balance $ 5,100