ACTIVITY 102 Purpose: FINANCIAL STATEMENT PREPARATION Apply the revenue recognition and the matching principles. Differentiate between accrual accounting and cash accounting. Prepare a multi-step income statement, the statement of retained earnings, a classified balance sheet, and the statement of cash flows. Yonghong opened Books Galore, Inc., for business on January 1, Year 1. The following financial items summarize the first year of operations. Use these items to prepare the Year 1 multi-step income statement, the Year 1 statement of stockholders' equity, the December 31, Year 1 classified balance sheet, and the Year 1 statement of cash flows in the space provided. a. b. C. Yonghong and her friend each invested $50,000 in cash (for a total of $100,000) in exchange for shares of common stock in Books Galore, Inc. On January 1, Year 1, purchased new equipment costing $70,000 with a 10-year useful life and no residual value. Paid cash. Straight-line depreciation is used. Rental costs for the year total $48,000. Of that amount, $4,000 remains unpaid at the end of the year, December 31, Year 1. d. January 1, Year 1, purchased and paid $2,000 for a two-year property insurance policy. e. f. g. h. January 1, Year 1, purchased a piece of land next to the store for $20,000 in cash. Later in the year, the land was sold to another small business owner for $30,000 in cash. During Year 1, customers purchased $300,000 of books. Of that amount, $250,000 has been collected from customers in cash and the remaining amounts will be collected next year. Inventory purchases totaled $200,000 for the year. All purchases have been paid for, and $18,000 of those purchases remain in inventory at the end of the year. On July 1, Year 1, borrowed $25,000 from a local bank and signed a one-year, 10% note payable. Principal and interest are due on June 30, Year 2. i. During Year 1, the company paid shareholders cash dividends totaling $8,000. j. At the end of the year, adjusting entries were recorded for depreciation expense and interest expense. Sales revenue Cost of goods sold Gross profit Operating expenses: Nonoperating revenues (expenses): Net income Multi-Step Income Statement Year 1