PRACTICE FIRST EXAM
“Economic resources” are assets, and “obligations” are liabilities.
Choice a. describes a statement
of cash flows.
Choice c. describes one of the objectives of financial statement analysis that involves
both the balance sheet and the income statement.
Choice d. describes one of the uses of the income
Think in terms of the statement of cash flows:
Beginning cash balance (?) + cash from operating
activities of $1,688,300 ─ $1,180,500 cash used by investing activities ─ $1,746,700 cash used by
financing activities = $419,600 ending cash balance.
Therefore, beginning balance =
Use our Assets = Liabilities + Stockholders’ Equity formula to first solve for beginning
Stockholders’ Equity, then for ending Stockholders’ Equity, and finally for ending Liabilities.
new stock issued
Use the formula Assets = Liabilities + Stockholders’ Equity.
The payment of $378,000 would
reduce cash and, thus,
decrease total assets by $378,000
The expenses to be paid next year
($54,000) represent an accrued liability at the end of the current year.
Thus, the adjustment to record
the expenses results in an
increase in total liabilities of $54,000
The total expenses of $432,000
would reduce net income, reduce retained earnings, and thus
reduce total stockholders’ equity by
Remember that Stockholders’ Equity consists of Capital Stock + Retained Earnings.
So, first use
the formula Assets = Liabilities + Stockholders’ Equity to determine Retained Earnings at the end of
Then, apply the formula for the statement of retained earnings to determine net income.
+ Net Inc.