The Demonstration Problem is a review of key chapter content. The Planning the Solution offers strategies in solving the problem.

After several months of planning, Jasmine Worthy started a haircutting business called Expressions. The following events occurred during its first month of business.

1. On August 1, Worthy invested $3,000 cash and $15,000 of equipment in Expressions in exchange for its common stock.

2. On August 2, Expressions paid $600 cash for furniture for the shop.

3. On August 3, Expressions paid $500 cash to rent space in a strip mall for August.

4. On August 4, it purchased $1,200 of equipment on credit for the shop (using a long-term note payable).

5. On August 5, Expressions opened for business. Cash received from haircutting services in the first week and a half of business (ended August 15) was $825.

6. On August 15, it provided $100 of haircutting services on account.

7. On August 17, it received a $100 check for services previously rendered on account.

8. On August 17, it paid $125 cash to an assistant for hours worked during the grand opening.

9. Cash received from services provided during the second half of August was $930.

10. On August 31, it paid a $400 installment toward principal on the note payable entered into on August 4.

11. On August 31, it paid $900 cash dividends to Worthy.

Required

1. Arrange the following asset, liability, and equity titles in a table similar to the one in Exhibit 1.9: Cash; Accounts Receivable; Furniture; Store Equipment; Note Payable; Common Stock; Dividends; Revenues; and Expenses. Show the effects of each transaction using the accounting equation.

2. Prepare an income statement for August.

3. Prepare a statement of retained earnings for August.

4. Prepare a balance sheet as of August 31.

5. Prepare a statement of cash flows for August.

6. Determine the return on assets ratio for August.

Planning the Solution

• Set up a table like Exhibit 1.9 with the appropriate columns for accounts.

• Analyze each transaction and show its effects as increases or decreases in the appropriate columns. Be sure the accounting equation remains in balance after each transaction.

• Prepare the income statement, and identify revenues and expenses. List those items on the statement, compute the difference, and label the result as net income or net loss.

• Use information in the Equity columns to prepare the statement of retained earnings.

• Use information in the last row of the transactions table to prepare the balance sheet.

• Prepare the statement of cash flows; include all events listed in the Cash column of the transactions table. Classify each cash flow as operating, investing, or financing.

• Calculate return on assets by dividing net income by average assets.

Solution to Demonstration Problem

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4.  

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5.  

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6.  

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   ^* Uses the initial $18,000 investment as the beginning balance for the startup period only.