Income Statement, Retained Earnings Statement, and Balance Sheet

On June 1, 2017, Elite Service Co. was started with an initial investment in the company of $22,100 cash. Below are the assets, liabilities, and common stock of the company June 30, 2017, and the revenues and expenses for the month of June, its first month of operations:

Cash	$4,600		Notes payable	$12,000
Accounts receivable	4,000		Accounts payable	500
Service revenue	7,500		Supplies expense	1,000
Supplies	2,400		Maintenance and repairs expense	600
Advertising expense	400		Utilities expense	300
Equipment	26,000		Salaries and wages expense	1,400
Common Stock	22,100

 

In June, the company issued no additional stock but paid dividends of $1,400.

Instructions

1-Prepare an income statement, retained earnings statement, and balance sheet analyzing your findings using the questions below, in a total of 350 – 500 words:

2- Briefly address whether the company’s first month of operations was a success.

 2-Discuss the company’s decision to distribute a dividend.

Solution

ELITE SERVICE CO.
Income Statement
For the Month Ended June 30, 2017
Revenues
Service revenue		$7,500
Expenses
Salaries and wages expense	$1,400
Supplies Expense	1,000
Maintenance and  repairs expense	600
Advertising expense	400
Utility Expense	300
Total expenses		-3,700
Net income		$3,800

 

 

ELITE SERVICE CO.
Balance Sheet
June 30, 2017
Assets
Cash		$4,600
Accounts receivable		$4,000
Supplies		$2,400
Equipment		$26,000
Total assets		$37,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$500
Notes payable	12,000
Total liabilities		12,500
Stockholders’ equity
Common stock	22,100
Retained earnings	2,400	24,500
Total liabilities and stockholders’ equity		$37,000

 

Briefly address whether the company’s first month of operations was a success.

The first month of operations started from an initial investment of $ 22100 cash. The resultant profit earned in the first month seems to be pretty successful. Although the profit generated has been not very impressive, yet the sales revenue earned in its first-month operations can be termed as a good start. The Elite company service has generated service revenue of $ 7500 in its first month by incurring operating and nonoperating expenses of $ 3700. The Elite company service has earned a profit or net income of $ 3800. Considering that the company was conducting service business in its first month, the 51% net income is a pretty reasonable effort. The net income margin of the company Elite services has been found to be 51% with 49% incurred in expenses. It is a pretty good start. Indeed, there is room for improvement by reducing the cost of operations and increase services revenue (Keller, 2013). Still, it can be termed as a successful first month of operations. The increase in profit has been transferred to the retained earnings account after the distribution of the dividend payment to its shareholders. The amount of retained earnings is also good enough for a new operating company. The balance sheet of the company Elite services for the first operating month shows that its asset value has increased. Moreover, the more dependency on equity sources of funding is also a good indicator of the healthy operation of the company Elite services. Overall, the first month of operations of the company Elite services has been profitable and subsequently successful (Watson & Head, 2016).

 Discuss the company’s decision to distribute a dividend.

The Elite company service has decided to declare a dividend of amount $1400 for its shareholders from its profits earned. The company wants to share its profits to its shareholders and its owners.  The company Elite services have distributed about 36% of its net income and retained 63% of its earnings in the retained earnings account for further reinvestment or expansion projects. The portion of net income declared as the dividend is more than one-fourth portion of the net income earned and thus can be considered as a major chunk. One can think it is quite risky to distribute a major portion of the income as dividends in the start of a business. However, it is a good gesture as it will raise the market value of the shares. The overall message to the market would be quite positive. It would send an image of success of its first-month operations to its owners and the market in general. However, as the company has liability in the form of notes payable of $12000, it can be said that the owners might feel risky at such distribution of cash dividends when it is liable to pay its debts first (Kimmel, Weygandt, & Kieso, 2015).  The condition of liquidity of the company is evidently good, and this risk can be mitigated by the presence of available cash and account receivable assets. Thus, the overall decision on the distribution of the dividend can be regarded as effective in representing the successful operation of the company (Klapper & Inessa, 2004).

References

Keller, A. (2013). Finance & Financial Management (1 ed.). GRIN Verlag.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2015). Financial Accounting: Tools for Business Decision Making (8 ed.). John Wiley & Sons.

Klapper, L. F., & Inessa, L. (2004). Corporate governance, investor protection, and performance in emerging markets. Journal of corporate Finance, 10(5), 703-728.

Watson, D., & Head, A. (2016). Corporate Finance: Principles and Practice (7 ed.). Prentice Hall.