Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 1-3

TIP: Even though there were four separate revenue transactions, they are reported in the aggregate on the income statement. Also notice that there is no distinction made on the income statement between cash revenue transactions and revenue transactions that are on account.

TIP: As you might be wondering, there are likely some other expenses incurred by the J. Lo Motorcycle Repair Shop, Inc. during August that have not yet been addressed. For example, some supplies were probably consumed in making repairs. Also, services such as power and telephone likely were consumed in August (for which payment will be made in September). These situations will be explained in Chapter 3.

TIP: Dividends are a form of owner withdrawals. They do not appear on the income statement because they are not expenses—they have no impact on operations. Dividends are a distribution of company profits and not a determinant of profits (net income).

TIP: Net income for one particular period is often referred to as earnings. Net income for all periods since the corporation was formed less total dividends since the inception of the business is referred to as retained earnings or accumulated earnings.

TIP: The retained earnings statement is often expanded to become the statement of stockholders' ...