Purpose:
•Apply the revenue recognition and the matching principles
•Differentiate between accrual accounting and cash accounting
•Prepare a multi-step income statement, the statement of retained earnings, a classified balance sheet, and the statement of cash flows

Yonghong opened Books Galore, Inc., for business on January 1, Year 1. The following financial items summarize the first year of operations. Use these items to prepare the Year 1 multi-step income statement, the Year 1 statement of stockholders’ equity, the December 31, Year 1 classified balance sheet, and the Year 1 statement of cash flows in the space provided.
( Use the following format: assets +100,000
Books Galore, Inc. -- TRANSACTIONS
ASSETS=LIABILITIES +STOCKHOLDERS’ EQUITY
a.Yonghong and her friend each invested $50,000 in cash (for a total of $100,000) in exchange for shares of common stock in Books Galore, Inc.
Response:
( Use the following format: assets +100,000, Equity +100,000)

b.On January 1, Year 1, purchased new equipment costing $70,000 with a 10-year useful life and no residual value. Paid cash. Straight-line depreciation is used.




c.Rental costs for the year total $48,000. Of that amount, $4,000 remains unpaid at the end of the year, December 31, Year 1.



d.January 1, Year 1, purchased and paid $2,000 for a two-year property insurance policy.


e.January 1, Year 1, purchased a piece of land next to the store for $20,000 in cash. Later in the year, the land was sold to another small business owner for $30,000 in cash.

f.During Year 1, customers purchased $300,000 of books. Of that amount, $250,000 has been collected from customers in cash and the remaining amounts will be collected next year.


g.Inventory purchases totaled $200,000 for the year. All purchases have been paid for, and $18,000 of those purchases remains in inventory at the end of the year.

h.On July 1, Year 1, borrowed $25,000 from a local bank and signed a one-year, 10% note payable. Principal and interest are due on June 30, Year 2.

i.During Year 1, the company paid shareholders cash dividends totaling $8,000.

j.At the end of the year, adjusting entries were recorded for depreciation expense and interest expense.

At the end of the year, an adjusting entry should also be recorded for insurance expense.



Multi-Step Income Statement
Year 1
Sales revenue = __________
Cost of goods sold=_____________
Gross profit=__________
Operating expenses:___________ ( list all individual)
Net income : ___________






STATEMENT OF STOCKHOLDERS’ EQUITY -- Year 1
Contributed Capital
Retained EarningsTotal SE Beginning balances
Additions:
Deductions:
Ending balances



CLASSIFIED BALANCE SHEET
December 31, Year 1
Current Assets:
( List all with balances)

Property, Plant, and Equipment:
(List all )

Total assets : __________

Liabilities:
Total Liabilities

Stockholders’ Equity:

Total Liabilities and SE: