FOR THE YEAR ENDED DECEMBER 31, 2007 Retained earnings, January 1, 2007 $130,520* Add: Net income 145,480 $276,000 Less: Dividends declared and paid 40,000 Retained earnings, December 31, 2007 $236,000 *Retained earnings, January 2, 2005 $ 0 Add: Net income: 2005 $ 85,200 2006 125,320 210,520 Deduct: Dividends: 2005 $ 40,000 2006 40,000 80,000 Retained earnings, December 31, 2006 $130,520 LO 8 EXERCISE 2-7 COMPONENTS OF THE STATEMENT OF CASH FLOWS 1. Paid for supplies—0 2. Collected cash from customers—0 3. Purchased land (held for resale)—0 4. Purchased land (for construction of new building)—I 5. Paid dividend—F 6. Issued stock—F 7. Purchased computers (for use in the business)—I 8. Sold old equipment—I
2-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL LO 9 EXERCISE 2-8 BASIC ELEMENTS OF FINANCIAL STATEMENTS 1.Management discussion and analysis—The information in this section of the an-nual report is prepared by management and is management’s opportunity to explainvarious items that appear in the financial statements. Increases and decreases invarious items are highlighted and reasons for these changes are given. The informa-tion in this section is not subject to any outside review or support. Users must rely onthe integrity of management that the information contained in the report is reliable.2.Product/markets of company—Management provides information in the annual re-port about the company’s products and markets. The detail provided by manage-ment differs widely among companies, but most companies describe their variousproducts and often show pictures of them. The distribution system for the products,i.e., whom the company sells to, is also described. Because the company’s productsand markets are a matter of public knowledge, they are subject to verification.3.Financial statements—These are the responsibility of management and are nor-mally prepared by the controller. They include the income statement, balance sheet,statement of changes in stockholders’ equity, and statement of cash flows. The infor-mation provided in the financial statements is subject to verification as part of the ex-ternal audit.4.Notes to financial statements—These are also the responsibility of management,and they include detailed explanations about the various items appearing in the fi-nancial statements. The first note in most annual reports is a summary of the signifi-cant accounting policies, such as the company’s inventory valuation methods anddepreciation methods. The information included in the notes is subject to review bythe independent auditors and is therefore highly verifiable.5.Independent accountants’ report—As the name implies, this report is prepared bythe independent auditors. It includes information about the scope of the audit (thestatements included in the audit), the auditing standards followed in conducting theaudit, and an opinion as to the fairness of presentation of the financial statements.Because the public relies on the auditors to render an impartial opinion, the auditingprofession is subject to a set of high ethical standards in performing audits.
MULTI-CONCEPT EXERCISES LO 3,5,7 EXERCISE 2-9 FINANCIAL STATEMENT CLASSIFICATION
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