Transaction 11, Sales on open account, January 17

Assets					=	Liabilities	+	Stockholders' Equity
		Accounts	Merchandise		Retained Earnings
	Receivable		Inventory
Sales on open account		+ 900			=	+ 900 (sales revenues)
Cost of merchandise
inventory sold			- 200		=	- 200 (costs of goods sold expenses)

Let’s visualize transaction 11.

A ssets	= Liabilities	+ Stockholders’ equity
Assets	= Liabilities	+ Paid-in capital	+ Retained earnings
Accounts receivable + Inventory	= Liabilities	+ Paid-in capital	+ Revenues	- Expenses
900	+ (-200)	= 0	+ 0 + 900	- 200
Increase in assets	700 = Increase in retained earnings			700

When the multinational pays its debt, in other words when Book Corner collects its account receivable, we recognize this transaction this way:

Transaction 12, Collection of accounts receivable, February 3

	Assets		=	Liabilities	+	Stockholders' Equity
	Cash	Accounts		Retained Earnings
		Receivable
Collection of accounts
receivable	+900	-900	=

(6) Net income or net earnings is the famous ‘bottom line’ on an income statement – the remainder after deducting all expenses from revenues. How does an income statement arrange the transaction to arrive at a net income of $1,350? Let’s assume that in January Book Corner also sold inventory of $2,500 (costs of goods sold was $850) – transaction 13, and paid a monthly rent of $1,000 – transaction 14.

Sales (revenues)					900+2,500
Costs of office supplies sold			-200
Rent			-1,000
Cost of goods sold			-850
Total expenses			-2,050
Total sales revenues					3,400
Net income			1,350

Of course, expenses could exceed revenues, in which case the company experiences a net loss.

‘TRANSLATION-1’ POINT

►Translate the income statement below into Russian:

Sales									200,000
Cost of goods sold									50,000
Gross profit									150,000
Operating expenses:
	Wages						20,000
	Depreciation						1,000
	Rent						5,000		26,000
Operating income									124,000
Other revenues and expenses:
	Rent revenue						500
	Interest revenue						300
	Total other revenue						800
	Deduct: interest expense							650	150
Income before income taxes									124,150
Income taxes									10,000
Net income									114,150

‘SHOW-2’ POINT

►Form teams of two persons each. Each person should make a list of 10 account names with approximately one-half being income statement and one-half being balance sheet accounts. Give the list to the other member of the team, who should write beside each account name the financial statement – ‘I’ for income statement and ‘B’ for balance sheet – to which it belongs. If there are errors or disagreements in classification, discuss the account and come to an agreement about which financial statement if belongs to.

‘THEORY-5’ POINT