EX 1-25 Financial statements

We-Sell Realty, organized August 1, 2016, is owned and operated by Omar Farah. How many errors can you find in the following statements for We-Sell Realty, prepared after its first month of operations?

we-Sell Realty Income Statement August 31, 2016 Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000 Expenses: Office salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,000 Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 Automobile expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      1,150 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,850 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  25,000 omar Farah Retained Earnings Statement August 31, 2015

Retained earnings, August 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $               0 Less dividends during August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10,000 $(10,000)

Issued additional common stock August 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     15,000 $     5,000 Net income for August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 Retained earnings, August 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000

Balance Sheet For the Month Ended August 31, 2016

AssetsLiabilities Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  8,900 Accounts receivable . . . . . . . . . . . . . . . . . . . .. $38,600 Accounts payable . . . . . . . . . . . . . . . . .  22,350 Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Stockholders’ Equity

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 30,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . $31,250 Total liabilities and stockholders’ equity . . . $72,600

Answer:

1. All financial statements should contain the name of the business in their heading. The retained earnings statement is incorrectly headed as “Omar Farah” rather than We-Sell Realty. The heading of the balance sheet needs the name of the business. 

2. The income statement and retained earnings statement cover a period of time and should be labeled “For the Month Ended August 31, 2016.” 

3. The year in the heading for the retained earnings statement should be 2016 rather than 2015. 

4. The balance sheet should be labeled “August 31, 2016,” rather than “For the Month Ended August 31, 2016.” 

5. In the income statement, the miscellaneous expense amount should be listed as the last expense. 

6. In the income statement, the total expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $24,150. This also affects the retained earnings statement and the amount of retained earnings that appears on the balance sheet. 

7. The additional issuance of common stock of $15,000 should not be included in the retained earnings statement. 

8. In the retained earnings statement, the net income should be presented first. Dividends should then be subtracted from net income to yield a net increase in retained earnings. 

9. Accounts payable should be listed as a liability on the balance sheet. 

10. Accounts receivable and supplies should be listed as assets on the balance sheet. 

11. The balance sheet assets should equal the sum of the liabilities and stockholders’ equity. 

Corrected financial statements appear as follows: 

WE-SELL REALTY 

Income Statement 

For the Month Ended August 31, 2016 

Sales commissions $140,000 

Expenses: 

Office salaries expense $87,000 

Rent expense 18,000 

Automobile expense 7,500 

Supplies expense 1,150 

Miscellaneous expense 2,200 

Total expenses 115,850 

Net income $ 24,150 

WE-SELL REALTY 

Retained Earnings Statement 

For the Month Ended August 31, 2016 

Retained earnings, August 1, 2016 $ 0 

Net income for August $24,150 

Less withdrawals during August 10,000 

Increase in retained earnings 14,150 

Retained earnings, August 31, 2016 $14,150 

WE-SELL REALTY 

Balance Sheet 

August 31, 2016 

Assets Liabilities 

Cash $ 8,900 Accounts payable $22,350 

Accounts receivable 38,600 

Supplies 4,000 Stockholders’ Equity 

Common stock $15,000 

Retained earnings 14,150 

Total stockholders’ 

equity 29,150 

Total liabilities and 

Total assets $51,500 stockholders’ equity $51,500