Q 50PGB-a - Horngren'S Financial And Managerial Accounting

Question

Pretty Pictures works weddings and prom-type parties. The balance of Retained Earnings was \(20,000 at December 31, 2017. At December 31, 2018, the business’s accounting records show these balances: Insurance Expense \) 6,000 Accounts Receivable $ 5,000 Cash 42,000 Notes Payable 10,000 Accounts Payable 13,000 Retained Earnings, Dec. 31, 2018 ? Advertising Expense 4,500 Salaries Expense 30,000 Service Revenue 115,000 Equipment 85,500 Dividends 13,000 Common Stock 28,000 Prepare the following financial statements for Pretty Pictures for the year ended December 31, 2018: a. Income statement. b. Statement of retained earnings. c. Balance sheet 

Step-by-Step Solution

Answer

Income statement is shown as follows:

Pretty Pictures
Income Statement
Year Ended December 31, 2018
Revenues
Service Revenue		$115,000
Expenses
Insurance Expense	6,000
Advertising Expense	4,500
Salaries Expense	30,000
Total Expenses		40,500
Net Income		$74,500

Step-by-Step Solution . Step 1: Calculation of net income

Net income is calculated as follows:

$$\begin{gathered} \mathbf{NetIncome}\mathbf{=}\mathbf{TotalRevenues}-\mathbf{TotalExpenses} \\ \mathbf{=}\mathbf{\$}\mathbf{115}\mathbf{,}\mathbf{000}-\mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{500} \\ \mathbf{=}\mathbf{\$}\mathbf{74}\mathbf{,}\mathbf{500} \end{gathered}$$

Step 2: Explanation of net income

Net income is reported when total revenues are higher than the total expenses.