Question

Ollie Company experienced the following events during its first-year operations.

(1)Acquired $72,000 cash from the issue of common stock.
(2)Borrowed $26,000 from the First City Bank.
(3)Earned $59,000 of cash revenue.
(4)Incurred $43,000 of cash expenses.
(5)Paid a $7,000 cash dividend.
(6)Paid $43,000 to purchase land.
Prepare an income statement?

Answer 1

To prepare Ollie Company's income statement, include $59,000 of cash revenue and $43,000 of cash expenses. The net income is calculated by subtracting expenses from revenue, resulting in a net income of $16,000 for the year.

Step-by-step explanation:

To prepare an income statement for Ollie Company's first year of operations, only revenue and expenses related to operations are considered. Capital transactions like issuing stock, taking out loans, or purchasing land are not included in an income statement; these affect the balance sheet and statement of cash flows instead.

The income statement would include the following:

Revenue: The cash revenue earned during the year, which is $59,000.

Expenses: The cash expenses incurred during the year, which are $43,000.

From these figures, Ollie Company's net income is calculated as:

Net Income = Revenue - Expenses

Therefore, the net income for Ollie Company is:

Net Income = $59,000 - $43,000 = $16,000

The cash dividend paid and the purchase of land are not included in the income statement because they are not expenses related to operations.