Corrected Financial Statements Heidi’s Bakery Inc. operates a small pastry business. The company has always maintained a complete and accurate set of records. Unfortunately, the company’s accountant left in a dispute with the president and took the 2010 fi nancial statements with her. The following balance sheet and income statement were prepared by the company’s president:

Heidi’s Bakery Inc.

Income Statement For the Year Ended December 31, 2010 Revenues:

Accounts receivable $15,500 Pastry revenue—cash sales 23,700 $39,200 Expenses:

Dividends $ 5,600 Accounts payable 6,800 Utilities 9,500 Salaries and wages 18,200 40,100 Net loss $ (900).

Heidi’s Bakery Inc.
Balance Sheet December 31, 2010 Assets Liabilities and Stockholders’ Equity Cash $ 3,700 Pastry revenue—
Building and equipment 60,000 credit sales $22,100 Less: Notes payable (40,000) Capital stock 30,000 Land 50,000 Net loss (900)
Retained earnings 22,500 Total liabilities and Total assets $73,700 stockholders’ equity $73,700 The president is very disappointed with the net loss for the year because net income has averaged $21,000 over the last ten years. He has asked for your help in determining whether the reported net loss accurately refl ects the profi tability of the company and whether the balance sheet is prepared correctly.
Required 1. Prepare a corrected income statement for the year ended December 31, 2010.
2. Prepare a statement of retained earnings for the year ended December 31, 2010.
(The actual amount of retained earnings on January 1, 2010, was $39,900. The December 31, 2010, Retained Earnings balance shown is incorrect. The president simply “plugged in” this amount to make the balance sheet balance.)
3. Prepare a corrected balance sheet at December 31, 2010.
4. Draft a memo to the president explaining the major differences between the income statement he prepared and the one you prepared.AppendixLO1