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Applying your understanding of the relationships among the financial statements: Question 1 25 marks
The assets and liabilities of Toronto Service Inc. as of December 31, 2008, and revenue and expenses for the year ended December 31, 2008 are listed below: Accounts Payable|$21,000||Property tax expense|$5,000|

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Accounts Receivable|25,000||Rent expense|3,000|
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Advertising expense|10,000||Salary expense|85,000|
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Building|140,000||Salary payable|12,000|
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Cash|10,000||Service Revenue|200,000|
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Furniture|20,000||Share Capital|75,000|
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Interest expense|4,000||Supplies|3,000|
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Land|98,000||Note Payable|95,000|
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Beginning Retained Earnings were $50,000 and dividends totalled $50,000 for the year. Required:
a. Prepare the Income Statement for the year ended December 31, 2008 (5 marks) TORONTO SERVICES INC
INCOME STATEMENT
Year Ended December 31, 2008
REVENUE
Service Revenue200,000
TOTAL REVENUE200,000

EXPENSES
Advertising Expense10,000
Interest Expense4,000
Preperty Tax Expense5,000
Rent Expense3,000
Salary Expense85,000
TOTAL EXPENSE107,000

NET INCOME93,000

b. Prepare the Statement of Retained Earnings for the year (5 marks) TORONTO SERVICES INC
STATEMENT OF RETAINED EARNINGS
December 31, 2008
Opening Retained Earnings50,000
Add: Net Income93,000
143,000
Less: Dividends (50,000)
Ending Retained Earnings93,000
c. Prepare the Balance Sheet at December 31, 2008 (7 marks)
TORONTO SERVICES INC
BALANCE SHEET
December 31, 2008
ASSETS
Cash10,000
Accounts Recievable25,000
Supplies3,000
Furniture20,000
Building140,000
Land98,000
TOTAL ASSETS296,000

LIABILITIES
Accounts Payable21,000
Salary Payable12,000
Note Payable95,000
TOTAL LIABILITIES128,000

SHAREHOLDERS EQUITY
Share Capital75,000
Retained Earnings93,000
TOTAL SHAREHOLDERS EQUITY168,000
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY296,000

d. Based on the financial statements prepared, answer the following questions: 1. Was Toronto Service Inc. profitable during 2008? If so by how much? (2 marks)
Toronto Services Inc was profitable by $93,000
2. Did Retained Earnings increase or decrease? What is the amount of the change? (2 marks)
Retained Earnings increased by $43,000
3. Which is the greater total, liabilities or total equity? Who owns more of the company’s assets, the creditors or the shareholders? (4 marks)
Total equity if greater than total liabilities. Therefore, since the equity, which is the shareholders' share of the company assets is greater than the liabilites, which are the creditors' share of the assets, the company's assets are owned more by the shareholders than the creditors. Question 2 15 marks (3 marks each)

a. If you could pick a single source of cash for your business, what would it be? Why?
I would chose revenue as my source of cash because it does not need to be paid back. It increases the income of the company and the cash increases its financial position by increasing assets, while not increasing the debt to any creditor and without giving away any share capital. Liabilites will need to be paid back, most likely with interest, while investors will later have a share of dividends. Revenue, on the other hand, will have corresponding expenses but will not accrue interest nor have a long term hold on the company's earnings. Some expenditures may be required, but for a higher return through the revenue. b. How can a business earn large profits but have a small balance in Retained Earnings?

Businesses that pay out a lot of dividends will have a smaller retained earnings balance even if they have higher income. This means that instead of the earnings remaining within the company, they are paid out to the shareholders and taken off the financial statements...
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