Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 65

Balance Sheet

The amounts of Family Health Care’s assets, liabilities, and stockholders’ equity as of

September 30 appear on the last line of the balance sheet columns of Exhibit 2. The bal-

ance sheet is prepared as shown in Exhibit 4.

In the liabilities section of Family Health Care’s balance sheet, notes payable is the

only liability. When there are two or more categories of liabilities, each should be listed

and the total amount of liabilities reported. Liabilities should be presented in the or-

der that they will be paid in cash. Thus, the notes payable due in 2012 will be listed

after the obligations that are due in shorter time periods.

For Family Health Care, the September 30, 2007, stockholders’ equity consists of

$6,000 of capital stock and retained earnings of $1,100. The retained earnings amount

is also reported on the retained earnings statement.

Statement of Cash Flows

Family Health Care’s statement of cash flows for September is prepared from the state-

ment of cash flows column of Exhibit 2. Cash increased from a zero balance at the be-

ginning of the month to $5,100 at the end of the month. This $5,100 increase in cash

was a result of cash flows from operating activities of $2,600.

In addition to cash inflows of $2,600 from operating activities, Family Health Care

spent $12,000 of cash for investing activities involving the purchase of land. This cash out-

flow related to investing activities was financed by an increased investment of $6,000 by

Dr. Landry and $10,000 borrowed through a note payable at First National Bank. Family

Health Care also distributed $1,500 in cash dividends during September.

Integration of Financial Statements

Exhibit 5 shows the integration of Family Health Care’s financial statements for

September. The ending cash balance of $5,100 on the balance sheet equals the ending

cash balance reported on the statement of cash flows. The net income of $2,600 is re-

ported on the income statement and the retained earnings statement. The ending re-

tained earnings of $1,100 is reported in the retained earnings statement and the balance

sheet. The cash flows from operating activities of $2,600 reported on the statement of

cash flows equals the net income on the income statement. However, as we illustrate

and explain in the next chapter, while cash flows from operating activities and net in-

come are related they are normally not equal.

Q.At January 1, 2007,
total assets and total liabil-
ities were $600,000 and
$380,000, respectively. At
December 31, 2007, total
assets and total liabilities
were $950,000 and
$580,000, respectively. If
dividends of $75,000
were paid in 2007, what
was the net income or
loss?

A.$225,000 [($950,000

$580,000)($600,000

$380,000)$75,000]

RECORDING A CORPORATION’S SECOND

PERIOD OF OPERATIONS

To reinforce your understanding of recording transactions and preparing financial

statements, we continue with Family Health Care’s October transactions. During

October, Family Health Care entered into the following transactions:

a. Received fees of $6,400 in cash.

b. Paid expenses in cash, as follows: wages, $1,370; rent, $950; utilities, $540; interest,

$100; and miscellaneous, $220.

c. Paid dividends of $1,000 in cash.

Analyze, record, and sum-
marize the transactions
for a corporation’s second
period of operations.

4