Corrected Financial Statements Hometown Cleaners Inc. operates a small dry-cleaning 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 him. The following income statement and balance sheet were prepared by the company’s president:

Hometown Cleaners Inc.

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

Accounts receivable $15,200 Cleaning revenue—cash sales 32,500 $ 47,700 Expenses:

Dividends $ 4,000 Accounts payable 4,500 Utilities 12,200 Salaries and wages 17,100 37,800 Net income $ 9,900 Hometown Cleaners Inc.
Balance Sheet December 31, 2010 Assets Liabilities and Stockholders’ Equity Cash $ 7,400 Cleaning revenue—
Building and equipment 80,000 credit sales $26,200 Less: Notes payable (50,000) Capital stock 20,000 Land 40,000 Net income 9,900 Retained earnings 21,300 Total liabilities and Total assets $77,400 stockholders’ equity $ 77,400 The president is very disappointed with the net income for the year because it has averaged $25,000 over the last ten years. She has asked for your help in determining whether the reported net income 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 balance of Retained Earnings on January 1, 2010, was $42,700. Note that 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 she prepared and the one you prepared.AppendixLO1