Question

At the end of Year 1 Bowers Company had $6,000 of assets, $2,000 of liabilities, $3,000 of common stock, and $1,000 of retained earnings. During Year 2 Bowers experienced the following events.

(1) Borrowed $4,000 cash.
(2) Earned $5,000 of cash revenue.
(3) Paid $3,000 of cash expenses.
(4) Paid $7,000 cash to purchase land.

Based on this information, the amount of net income, cash flow from investing activities, and total liabilities appearing on the Year 2 financial statements is:
a) Net income: $2,000, Cash flow from investing activities: -$7,000, Total liabilities: $10,000
b) Net income: $4,000, Cash flow from investing activities: -$7,000, Total liabilities: $6,000
c) Net income: $2,000, Cash flow from investing activities: -$3,000, Total liabilities: $5,000
d) Net income: $4,000, Cash flow from investing activities: -$3,000, Total liabilities: $6,000

Answer 1

The correct answer to the student's question is net income of $2,000, cash flow from investing activities of -$7,000, and total liabilities amounting to $6,000 at the end of Year 2 for Bowers Company.

Step-by-step explanation:

The student is asking for help in determining the net income, cash flow from investing activities, and total liabilities for Bowers Company at the end of Year 2. To find these values, we'll analyze each event that happened during the year:

1. The company borrowed $4,000 cash, which increases liabilities and cash.
2. It earned $5,000 of cash revenue, which increases both cash and retained earnings (or net income, assuming there are no dividends paid).
3. It paid $3,000 of cash expenses, which decreases both cash and retained earnings (or net income).
4. It paid $7,000 cash to purchase land, which is an investing activity and does not affect net income but does reduce cash.

Based on this information:

• Net income is calculated as total revenue ($5,000) minus total expenses ($3,000), which equals $2,000.
• Cash flow from investing activities is the purchase of land for cash, which is -$7,000.
• Total liabilities at the beginning of the year were $2,000, with an additional $4,000 borrowed during the year, totalling $6,000.

Therefore, the correct answer is:

Net income: $2,000, Cash flow from investing activities: -$7,000, Total liabilities: $6,000.