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Chapter 1: Q22E_2 (page 38)

Mountain Drycleaners started 2018 with total assets of \(19,000 and total liabilities of \)14,000. At the end of 2018, Mountain鈥檚 total assets stood at \(12,000 and total liabilities were \)9,000. Requirements 1. Did the stockholders鈥� equity of Mountain Drycleaners increase or decrease during 2018? By how much? 2. Identify the four possible reasons that stockholders鈥� equity can change

Short Answer

Expert verified

(1) Stockholders鈥� Equity decreases by $2,000.

(2) Dividends, revenues, expenses and common stock.

Step by step solution

01

Calculation of Total Stockholders’ Equity

Total stockholders鈥� equity of 2018 beginning and end is calculated as follows:

Stockholders' Equity at 2018 Beginning = Assets - Liabilities

= $19,000 - $14,000

= $5,000

Stockholders' Equity at 2018 End = Assets - Liabilities

= $12,000 - $9,000

= $3,000

02

Calculation of decrease in stockholders’ equity

Decrease in stockholders鈥� equity is calculated as follows:

Decrease in Stockholders' Equity = Stockholders' Equity at 2018 Beginning - Stockholders' Equity at 2018 end

= $5,000 - $3000

= $2000

03

Reason for change in stockholders’ equity

Reasons for the change are as follows:

  • Dividends are paid out of retained earnings, hence it decreases retained earnings as it is a part of equity.
  • Expenses are costs incurred to avail services, which reduces equity.
  • Revenues are the income generated by way of selling of goods or services, and it affects the equity.
  • Issuance of common stock increase the contributed capital, which is a part of stockholders鈥� equity.

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Most popular questions from this chapter

Describe the similarities and differences among the four different types of business entities discussed in the chapter.

Describe the various types of individuals who use accounting information and how they use that information to make crucial decisions

Cosmo Thomas started a new business, Thomas Gymnastics, and completed the following transactions during December: Dec. 1 Received \(19,000 cash from Thomas in exchange for common stock. 2 Received \)3,800 cash from customers for services performed. 5 Paid \(300 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, \)4,500. 10 Received \(150 invoice for utilities due in two weeks. 15 Paid for advertising in the local paper, \)350. 20 Paid utility invoice received on Dec. 10. 25 Collected cash in full from customer billed on Dec. 9. 28 Paid rent for the month, \(2,600. 28 Paid \)1,200 to assistant for wages. 30 Received \(1,600 cash from customers for services performed. 31 Cash dividends of \)3,000 were paid to stockholders. Analyze the effects of the transactions on the accounting equation of Thomas Gymnastics using a format similar to Exhibit 1-6.

Identifying accounts on the financial statements Consider the following accounts: a. Accounts Payable b. Cash c. Common Stock d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Dividends i. Land j. Salaries Expense Identify the financial statement (or statements) that each account would appear on. Use I for Income Statement, RE for Statement of Retained Earnings, B for Balance Sheet, and C for Statement of Cash Flows.

Identifying users of accounting information

For each of the users of accounting information, identify whether the user is an external decision maker (E) or an internal decision maker (I):

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c. Internal Revenue Service

d. lender

e. investor

f. controller

g. cost accountant

h. SEC
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