Nature of Retained Earnings This is an exercise on the relationships between assets, liabilities, and ownership equities. The numbers are small, but the underlying concepts are large.

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1. Assume an opening balance sheet of: Cash $1,000 Paid-in capital $1,000 2. Purchase inventory for $800 cash. Prepare a balance sheet. A heading is unnecessary in this and subsequent requirements. 3. Sell the entire inventory for $950 cash. Prepare a balance sheet. Where is the retained earnings in terms of relationships within the balance sheet? That is, what is the meaning of the retained earnings? Explain in your own words. 4. Buy inventory for $300 cash and equipment for $800 cash. Prepare a balance sheet. Where is the retained earnings in terms of relationships within the balance sheet? That is, what is the meaning of the retained earnings? Explain in your own words. 5. Buy inventory for $500 on open account. Prepare a balance sheet. Where is the retained earnings and account payable in terms of the relationships within the balance sheet? That is, what is the meaning of the account payable and the retained earnings? Explain in your own words.