Generally Accepted Accounting Principles and Net Income

(10 min.) E 1-23
Req. 1

The owner’s equity increased during the year by $4,000. Beginning owner’s equity: $19,000 – $9,000 = $10,000 Ending owner’s equity : $27,000 – $13,000 = $14,000 Change in owner’s equity: $14,000 – $10,000 = $4,000

Req. 2
Owner’s equity can change three ways:
Owner's equity can increase through: Owner contributions and/or Net income
Owner's equity can decrease through: Owner drawings

(10 - 15 min.) E 1-24
Req. 1

Net income for American Express Services (AES) is $7,000,000,000.

Revenues – Expenses = Net Income $21,000,000,000 - $14,000,000,000 = $7,000,000,000

Req. 2

The owner’s equity increased during the year by* $7,000,000,000.
*$30,000,000-14,000,000= $16,000,000 $23,000,000-14,000,000=$9,000,000 16,000,000-9,000,000=$7,000,000
Req.3
The AES’s performance for 2012 is good, because 2012 was a profitable year.

(30-40 min.) E 1-25
Req. 1

Assets
-
Liabilities
=
Owner’s equity
Beginning
$ 45,000
-
$29,000
=
$16,000
Ending
$ 55,000
-
$38,000
=
$17,000

Owner’s equity

Beginning balance:

$ 16,000
Investment by the owner
0
Net income
20,000

$36,000
Drawings
(19,000)
Ending balance
$17,000

Felix earned net income of $20,000.

Revenue
-
Net income
=
Expenses
$ 242,000
-
$20,000
=
$222,000

Req. 2

Felix’s performance for the year was good because the business earned a net income.

(10 - 15 min.) E 1-28

Req. 1 Davis Design Studio
Income Statement
Year Ended December 31, 2012
Revenue:

Service revenue

$158,300
Expenses:

Salary expense
$65,000

Rent expense
23,000

Utilities expense 6,900

Supplies expense
4,200

Property tax expense 1,500

Total expenses

100,600
Net income

$ 57,700

The