University Name: University of the People

Student Registration Number: s272281

Student Name: Taurai Chigodora

Unit Code: Unit 1

Unit Title: Review of Key Financial Statements

Instructor: Jamal Boubetana

Task: Written Assignment Unit 1

Completing financial statements of Polly’s Pet Products.

Financial statements helps a business to assess its performance, measuring its net worth and showing how

it is generating and using cash. The main financial statements of a business are balance sheet, income

statement and statement of cash flows should be prepared according to accounting principles and

International Accounting standards (Walther and Skousen, 2009). This assignment is aimed at completing

the financial statements of Polly’s Pet Products starting with the income statement then balance sheet and

finally statement of cash flows.

“The income statement is a financial statement that is used to help determine the past financial

performance of the enterprise, predict future performance, and assess the capability of generating future

cash flows” (L. Candela, 2012). Operational costs can be derived by deducting gross profit from revenue.

There operational costs = $650 000 - $205 000 = $ 445 000. Operational costs are direct expenses

incurred by a business on acquiring goods for resale for example purchases and carriage inwards.

Operating income is derived by subtracting general and administrative expenses from gross profit.

Operating income = $205 000 - $75 000 = $130 000. Operating income is the amount of profit realized

from a business’s operations after deducting operating expenses such as wages and rent.

Income before provision for income taxes can be obtained by deducting other expense from operating

income. Income before provision for income taxes = $130 000 - $60 000 = $70 000. Income before

provision for income taxes is profit before deducting income taxes.

Net income is profit after income tax (income minus expenses), it used to be called net profit and it can

calculated by deducting provision for income tax from income before provision for income taxes. Net

income = $70 000 - $5 000 = $65 000.

Retained earnings, ending balance is found by adding retained earnings, beginning balance to net income.

Retained earnings, ending balance = $103 500 + $65 000 = $168 500. Retained earnings refers to the
balance of undistributed profits and it is one of the major sources of finance for a limited company. It is a

revenue reserve recorded in the balance sheet.

The balance sheet records the assets, liabilities and capital of a business and it shows the net worth of a

business (Walther and Skousen, 2009). It is prepared based upon the accounting equation that is Assets =

liabilities + capital. Accrued expenses are expenses incurred but unpaid at the year end and there a current

liability to a business. Accrued expenses can be obtained by subtracting all other current liabilities from

the total of current liabilities. Accrued expenses = $123 500 - $75 000 - $5 000 - $12 000 - $1 500 =

$30 000.

Notes payable are written agreements in which one party agrees to pay the other a certain amount of cash

and they usually long term liability to a firm (L. Candela, 2012). Notes payable can be calculated by

deducting the total of current liabilities from the total of liabilities. Notes payable = $161 500 - $123 500

= $38 000.

Retained earnings refers to the balance of undistributed profits and ending balance in the income

statement should be transferred to the balance sheet. Therefore retained earnings = $168 500.

Stockholders’ equity is the total amount of capital given to a company by its shareholders in exchange for

stock plus any donated capital or retained earnings and it is the major source of finance to a business.

Shareholders’ equity = $5000 + $15 000 + $168 500 = $188 500. Total liabilities and shareholders’ equity

= $161 500 + $188 500 = $350 000.

Total assets refers to the total value of resources owned by a business and is equivalent to the value of

total liabilities and shareholders’ equity. Therefore total assets = $350 000. Assets are used in the

production process.

Current assets are short term, liquid assets that are expected to be converted to cash within one year

(Randall, 1996). Currents assets can be calculated by deducting fixed assets from total assets
= $350 000- $75 000 = $275 000. Cash is current assets comprising currency or currency equivalents that

can accessed immediately or near immediately. Cash = $275 000 - $50 000 - $25 000 = $200 000.

Statement of cash flows shows how a business is generating and using cash (Walther and Skousen, 2009).

Cash paid out to suppliers and employees is an outflow under operating activities and it can be can

calculated by observing the difference between Net cash provided by operating activities and given items

of operating activities. Cash paid out to suppliers and employees = $600 000 - $185 000 - $5 000 -

$10000 = $400 000.

Net cash provided by financing activities is the difference cash inflows and cash outflows from financing

= $50 000 + $5 000 - $45 000 = $10 000.

Net change in cash is the summation of net cash provided by operating activities, net cash used in

investing activities and net cash provided by financing activities. Net change in cash = $185 000 - $25

000 + $10 000 = $170 000. Cash balance at the end of the year is obtained by adding net change in cash

and cash balance at the beginning of the year = $170 000 + $30 000 = $200 000.

Conclusively the performance of Polly’s Pet Products is relatively good as indicated by the net income of

$65 000. However the performance can be assessed better by comparing to past records and competitors

and also using ratios. The liquidity position is also good as current assets are more than two times the

current liabilities and the major form of finance are retained earnings. The cash flow position of the

business is improving as shown by an increase of the cash balance from $30 000 to $200 000.

Reference List

1. Larry M. Walther and Christopher J. Skousen. (2009). Management and Cost Accounting,

Bookboon.com the ebook company.

2. Candela L. (2012), Boundless Finance-The income statement,

https://courses.lumenlearning.com/boundless-finance/chapter/the-income-statement/

3. Randall H. (1996), Accounting 3rd Edition, Gosport, Hampshire, Ashford Color Press Ltd.