Early in the year 2003, John Roberts, a recent graduate of Southeast State College, delivers the financial statements shown on page 277 to Laura Dennis of Dennis, Inc. After a quick review, Dennis exclaims, "What do you mean I had net income of \($20,000?\) I borrowed \($40,000\) from the bank and my cash balance decreased by \($2,000\). I must have had a loss! Some kind of accountant you are!" How should Mr. Roberts answer Ms. Dennis?

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Cash Accounts receivable. Inventory... Equipment (at cost) Accumulated depreciation. Total assets. Accounts payable Notes payable-long-term. Common stock, $1 par. Dennis, Inc. Comparative Balance Sheet December 31, 2002 and 2001 Assets 2002 2001 $ 3,000 $ 5,000 18,000 8,000 20,000 15,000 52,000 20,000 (10,000) (5,000) $83,000 $43,000 Liabilities and Stockholders' Equity $ 4,000 $ 9,000 40,000 2,000 2,000 18,000 18,000 19,000 14,000 $83,000 $43,000 Additional paid-in capital Retained earnings Total liabilities and stockholders' equity. Dennis, Inc. Combined Statement of Income and Retained Earnings For the Year Ended December 31, 2002 Sales Cost of goods sold Operating expenses (including depreciation of $5,000). Net income Add: Retained earnings, January 1, 2002 Deduct: Dividends paid. Retained earnings, December 31, 2002. $240,000 $150,000 70,000 220,000 $ 20,000 14,000 (15,000) $ 19,000