Corrected Financial Statements Hometown Cleaners Inc. operates a small dry-cleaning business. The company has al- ways maintained a complete and accurate set of records. Unfortunately, the company's accountant left in a dispute with the president and took the 1998 financial statements with him. The balance sheet and the income statement shown below were prepared by the company's president.

The president is very disappointed with the net income for the year because it has aver- aged $25,000 over the last 10 years. She has asked for your help in determining whether the reported net income accurately reflects the profitability of the company and whether the balance sheet is prepared correctly.

Required 1. Prepare a corrected income statement for the year ended December 31, 1998. 2. Prepare a statement of retained earnings for the year ended December 31, 1998. (The actual balance of retained earnings on January 1, 1998 was $42,700. Note that the December 31, 1998, balance shown above is incorrect. The president simply "plugged" this amount in to make the balance sheet balance.) 3. Prepare a corrected balance sheet at December 31, 1998. 4. Draft a memo to the president explaining the major differences between the income statement she prepared and the one you prepared.

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Revenues: HOMETOWN CLEANERS INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998 Accounts receivable Cleaning revenue-cash sales Expenses: Dividends Accounts payable Utilities Salaries and wages Net income $15,200 32,500 $47,700 $ 4,000 4,500 12,200 17,100 37,800 $ 9,900