Question

After several months of planning, Joanne Cardinal started a haircutting business called The Cutlery. The following
during its first month, August 2017:
On August 1, Cardinal put $16,000 cash into a chequing account in the name of The Cutlery. She also invested $10
already owned.
On August 2, she paid $2,000 cash for furniture for the shop.
On August 3, she paid $3,200 cash to rent space in a strip mall for August.
On August 4, she equipped the shop by installing the old equipment and some new equipment that she bought on cr
amount is to be repaid in three equal payments at the end of August, September, and October.
On August 5, The Cutlery opened for business. Receipts from services provided for cash in the first week and a hal
15) were $1,100.
On August 15, Cardinal provided haircutting services on account for $750.
On August 17, Cardinal received a $750 cheque in the mail for services previously rendered on account.
On August 17, Cardinal paid wages of $250 to an assistant for working during the grand opening.
On August 18, Cardinal interviewed a job applicant. The applicant was successful in getting the position and will re
part-time work starting in September.
Cash receipts from services provided during the second half of August was $1,950.
On August 31, Cardinal paid an installment on the account payable created in (d).
On August 31, the August hydro bill for $450 was received. It will be paid on September 14.
On August 31, Cardinal withdrew $500 cash for her personal use.
 
Required
1. Arrange the following asset, liability, and equity titles in a table similar to the one in Exhibit 1.15: Cash; Accoun
Store Equipment; Accounts Payable; and Joanne Cardinal, Capital. Show the effects of each transaction on the equa
changes in equity.
2. Prepare an income statement for August.
3. Prepare a statement of changes in equity for August.
4. Prepare a balance sheet as of August 31.
 
Analysis Component:
Identify how much of the assets held by The Cutlery are owned by the owner, Joanne Cardinal.
How much of the total assets are financed by equity? By debt? Explain what it means to “finance assets by equity:
debt.”
  
Planning the Solution
Set up a table with the appropriate columns, including a final column for describing the transactions that affect equ
Identify and analyze each transaction and show its effects as increases or decreases in the appropriate columns. Be
equation remains in balance after each transaction.
To prepare the income statement, find the revenues and expenses in the Explanation of Equity Transaction column.
statement, calculate the difference, and label the result as profit or loss.
Use the information in the Explanation of Equity Transaction column to prepare the statement of changes in equity.
Use the information in the last row of the table to prepare the balance sheet.
Prepare an answer to each part of the analysis component question.
The Cutlery. The following business activities occurred

tlery. She also invested $10,000 of equipment that she

Required 1.
Assets
S.No. Cash + Accounts Receivable
ipment that she bought on credit for $21,000. This a. $16,000
ctober.
h in the first week and a half of business (ended August b. — 2,000
Bal. $14,000
c. — 3,200
dered on account. Bal. $10,800
d opening. d.
tting the position and will receive $750 per week for
Bal. $10,800
e. 1100
Bal. $11,900
er 14. f. +$750
Bal. $11,900 $750
g. 750 -750
Exhibit 1.15: Cash; Accounts Receivable; Furniture; Bal. $12,650 $ -0
each transaction on the equation. Explain each of the h. — 250
Bal. $12,400
i. No entry*
j. 1950
Bal. $14,350
k. — 7,000
ardinal. Bal. $ 7,350
o “finance assets by equity: and to “finance assets by l.
Bal. $ 7,350
m. — 500
transactions that affect equity. Bal. $ 6,850 + $ -0
he appropriate columns. Be sure that the accounting $39,850
Equity Transaction column. List those items on the
(i) does not involve an ec
tement of changes in equity.
 Assets Liabilities Equity
+ Furniture + Store Equipment = Accounts Payable + Joanne Cardinal, Capital
$10,000 $26,000
+$2,000
$2,000 $10,000 $26,000
-3,200
$2,000 $10,000 $22,800
21,000 +$21,000
$2,000 $31,000 $21,000 $22,800
1,100
$2,000 $31,000 $21,000 $23,900
750
$2,000 $31,000 $21,000 $24,650

$2,000 $31,000 $21,000 $24,650

-250
$2,000 $31,000 $21,000 $24,400

1,950
$2,000 $31,000 $21,000 $26,350
-7,000
$2,000 $31,000 $14,000 $26,350
450 -450
$2,000 $31,000 $14,450 $25,900
-500
+ $2,000 + $31,000 = $14,450 + $25,400
$39,850 $39,850

i) does not involve an economic exchange between two parties; therefore it does not affect the accounting equation.
 Solution

Explanation of equity transaction

Investment by Owner

Rent Expense

Haircutting Services Revenue

Haircutting Services Revenue

Wages Expense

Haircutting Services Revenue

Hydro Expense

Withdrawal by Owner

counting equation.
 Solution

Required 2
The Cutlery Income Statement For Month Ended August 31, 2014
Revenues:
Haircutting services revenue $3,800
Operating expenses:
Rent expense $3,200
Hydro expense $450
Wages expense $250
Total operating expenses $3,900
Net loss $100

Required 3 Statement of Changes in Equity

For Month Ended August 31, 2014
Joanne Cardinal, capital, August 1 $ –0–
Add: Investments by owner $26000
Total $26,000
Less: Withdrawals by owner $500
Net loss $100
Total $600
Joanne Cardinal, capital, August 31 $25,400
Required 4 Balance Sheet
August 31, 2014
Assets Liabilities
Cash $6,850 Accounts payable
Furniture $2,000 Equity
Store equipment $31,000 Joanne Cardinal, capital
Total assets $39,850 Total liabilities and equity

Required 4
Analysis Component:

Ans a. $25,400 or 64% ($25,400/$39,850 x 100% 63.74% or 64%) of

the total assets are owned by the owner, Joanne Cardinal.

Ans b. $25,400 or 64% ($25,400/$39,850 x 100% 63.74% or 64%) of

the total assets are financed by equity. $14,450 or 36% ($14,450/$39,850
100% 36.26% or 36%) of the total assets are financed by debt.

To finance assets by equity means that the equity transactions of owner

investment, plus net income (or less net loss), and less owner
withdrawals resulted in a portion of the assets. In the case of The
Cutlery, 64% of the assets at August 31, 2014, resulted from these equity
transactions.

To finance assets by debt (or liabilities) means that a portion of the

assets resulted from borrowings. In the case of The Cutlery, 36% of the
assets at August 31, 2014, resulted from, specifically, accounts payable.
e Sheet
31, 2014
Liabilities
$14,1450
Equity
$25,400
$39,850

omponent:

50 x 100% 63.74% or 64%) of

, Joanne Cardinal.

850 x 100% 63.74% or 64%) of

$14,450 or 36% ($14,450/$39,850
sets are financed by debt.

the equity transactions of owner

t loss), and less owner
assets. In the case of The
, 2014, resulted from these equity

) means that a portion of the

case of The Cutlery, 36% of the
m, specifically, accounts payable.