Book 1 - Chapter 17


	6.	The purpose of the statement of owner’s equity is to explain, for a specific period of time, the entire change in owner’s equity. This is accomplished by combining the net income or net loss (from the income statement) with the owner’s investments and withdrawals.
	7.	The purpose of the balance sheet is to show the business wealth and the claims on that wealth. This is accomplished by listing all the assets with dollar amounts, the debts owed and their amounts, and then recording the difference between the two totals as owner’s equity.
	8.	The purpose of the statement of cash flows is to explain, for a specific period of time, the change in the amount of cash shown on the balance sheet.
	9.	The statements are connected. This connection is called “articulation.” Specifically:
		The net income on the income statement is also included on the statement of owner’s equity to explain the amount of the change in owner’s equity that was caused by the business operations (compared to other changes in owner’s equity caused by owner investments or withdrawals).
		The statement of owner’s equity explains all the changes in owner’s equity during a period. The ending balance of owner’s equity on the statement of owner’s equity is also exactly the same amount of owner’s equity that appears on the balance sheet.
		The balance sheet and the income statement are also related. Every item of revenue or expense on the income statement will affect some asset or liability item on the balance sheet by the same amount.
	10.	Income statement: Revenue increases, and therefore net income increases.
		Statement of owner’s equity: Net income increases, and therefore the ending balance of owner’s equity increases.
		Balance sheet: The asset Cash increases, and owner’s equity increases.
	11.	Income statement: An expense increases, and therefore net income decreases.
		Statement of owner’s equity: Net income decreases, and therefore the ending balance of owner’s equity decreases.
		Balance sheet: The asset Supplies decreases, and owner’s equity decreases.
	12.	Change in owner’s equity during September: $259,000 – $250,000 = $9,000 decrease. $15,000 withdrawals – $9,000 total decrease = $6,000 difference to account for. This is the net income from the income statement. The owner’s withdrawal reduced the owner’s equity by $15,000, but this decrease of owner’s equity was partially offset by $6,000 of net income, so the total decrease was only $9,000. OR: 259,000 + X – 15,000 = 250,000. x = 6,000.
	13.	The “change statements” are the income statement, the statement of owner’s equity, and the statement of cash flows. The “condition statement” is the balance sheet, which shows wealth and claims on wealth (the financial condition) at a point in time.
	14.	Four important qualities are:
		reliability
		relevance
		consistency
		comparability
		The qualities of reliability and relevance are most important. If information is not reliable and not relevant, it will never be useful, regardless of other qualities.

Learning Goal 17, continued

SOLUTIONS

Section IV · The Essential Financial Statements

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Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.