Prepare An Income Statement And Retained Earnings Statement

Prepare An Income Statement Retained Earnings Statement A

Hightower Service Co. was started with an initial investment in the company of $22,100 cash. Assets, liabilities, and common stock at June 30, along with revenues and expenses for June, are provided. The company did not issue additional stock in June but paid dividends of $1,400. The assignment involves preparing an income statement, retained earnings statement, and balance sheet for June 2014, analyzing whether the first month was successful, and discussing the dividend distribution.

Paper For Above instruction

Introduction

In this paper, we analyze the financial performance and position of Hightower Service Co. for its first month of operations, June 2014. The process involves preparing crucial financial statements: an income statement, retained earnings statement, and a balance sheet. Additionally, we evaluate whether the business's first month was a success and discuss the implications of the company's dividend payout. This comprehensive financial analysis provides insight into the company’s profitability, financial health, and strategic decisions at this early stage of development.

Data Overview

The company was initialized with a cash investment of $22,100. As per the data provided at June 30, 2014, the company's assets include cash, accounts receivable, supplies, and equipment, while liabilities cover notes payable and accounts payable. Revenue recognized is $7,500, with corresponding expenses detailed for salaries and wages, supplies, maintenance and repairs, advertising, and utilities. Additionally, dividends of $1,400 were paid during June. These figures serve as the foundation for constructing the financial statements.

Preparation of the Income Statement

The income statement summarizes the company’s revenues and expenses to determine net income for June. The total expenses include salaries and wages, supplies, maintenance and repairs, advertising, and utilities. Summing these expenses and subtracting the total from revenues yields the net income, which reflects the company's profitability for its first month.

  • Revenues: $7,500
  • Expenses:
  • Salaries and wages: $1,400
  • Supplies: $1,000
  • Maintenance and repairs: $600
  • Advertising: $400
  • Utilities: $300
  • Total Expenses: $4,700
  • Net Income: $2,800 (Revenue - Total Expenses)

Preparation of the Retained Earnings Statement

The retained earnings statement starts with the beginning retained earnings balance, which, assuming zero at the start of operations, is adjusted by adding net income and subtracting dividends to arrive at the ending retained earnings.

  • Beginning Retained Earnings: $0
  • Add: Net Income: $2,800
  • Less: Dividends: $1,400
  • Ending Retained Earnings: $1,400

Preparation of the Balance Sheet

The balance sheet presents the company's assets, liabilities, and stockholders' equity as of June 30, 2014. Assets include cash, accounts receivable, supplies, and equipment. Liabilities consist of notes payable and accounts payable. Stockholders' equity comprises common stock and retained earnings.

  • Assets:
  • Cash: $4,600
  • Accounts receivable: $4,000
  • Supplies: $2,400
  • Equipment: $26,000
  • Total Assets: $37,000
  • Liabilities:
  • Notes payable: $12,000
  • Accounts payable: $500
  • Total Liabilities: $12,500
  • Stockholders' Equity:
  • Common stock: $22,100
  • Retained earnings: $1,400
  • Total Stockholders' Equity: $23,500
  • Total Liabilities and Equity: $36,000

Discussion of Results

The net income of $2,800 indicates that the company was profitable in its first month, primarily driven by service revenue exceeding expenses. The retained earnings increased to $1,400 after dividends, signaling initial profitability and positive cash flow. The total assets exceeded liabilities, demonstrating a healthy financial position. However, the company’s current assets are lower than total liabilities, suggesting that additional financing or profit accumulation may be necessary for sustainable growth. The initial success appears promising, but ongoing performance and cash flow management are vital for future stability.

Business Performance Analysis

Assessing the company's first month involves considering profitability, liquidity, and operational efficiency. The positive net income reflects effective revenue generation relative to expenses. The strong asset base, notably equipment and receivables, suggests the company is investing in its core operations. However, cash flow remains modest, with cash at $4,600 compared to total assets, and liabilities are significant. Maintaining profitability and improving liquidity would support long-term viability.

Dividend Payout Decision

The decision to distribute dividends of $1,400 demonstrates a commitment to returning value to shareholders despite the company's recent inception. This dividend payout reduces retained earnings, but indicates confidence in ongoing profitability and liquidity. Distributing dividends at this stage can boost investor confidence and provide immediate rewards, yet it comes with the trade-off of retaining less earnings for reinvestment. Future dividend policies should balance growth needs and shareholder expectations.

Conclusion

Hightower Service Co.'s first month of operations was financially productive, showing profitability and prudent management. The preparation of key financial statements highlights the company's initial financial health, revealing opportunities for strategic focus on liquidity and growth. The dividend payout aligns with investor interests but warrants ongoing assessment as the company matures. Overall, the early results are promising, setting a foundation for sustained development and success in the competitive service industry.

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