Assignment 2 Vardaan Vig | 221170

Question 1
a) Opening Balance Sheet

An individual starts a retail company selling dresses with an initial investment of Rs. 250. The funds are
used to purchase 5 dresses for Rs. 200 (each dress costing Rs. 40) that will be resold for Rs. 75 each. The
company issues stock to reflect the investment.

Opening Balance Sheet Amount (Rs.)

Cash 50

Inventory 200

Total Assets 250

Total Liabilities 0

Contributed Capital (Equity) 250

Earned Capital 0

Total Liabilities and Equity 250

● Cash: Rs. 50
(Initial cash of Rs. 250 minus Rs. 200 used to purchase inventory)
● Inventory: Rs. 200
(Cost of 5 dresses purchased at Rs. 40 each)
Since the company issues stock to reflect the investment, the Rs. 250 invested by the individual is
recorded under "Contributed Capital (Equity)" on the opening balance sheet. This entry represents the
owner's equity in the company resulting from their investment. The issuance of stock increases the equity
section by Rs. 250, balancing the increase in assets (cash and inventory) from the investment and
purchase of inventory. This ensures that the accounting equation (Assets = Liabilities + Equity) holds,
with total assets of Rs. 250 equal to total liabilities and equity of Rs. 250.

b) Income Statement and Updated Balance Sheet

During the period:

● Sold 2 dresses at Rs. 75 each:

Sales Revenue = 2 * Rs. 75 = Rs. 150
● Cost of Goods Sold (COGS) for 2 dresses:
COGS = 2 * Rs. 40 = Rs. 80
● Expenses incurred: Rs. 50 (paid in cash)

Income Statement Amount (Rs.)

Sales Revenue 150

Cost of Goods Sold 80

Gross Profit 70

Expenses 50

Net Income 20

Updated Balance Sheet

Updated Balance Sheet Amount (Rs.)

Cash 150

Inventory 120

Total Assets 270

 Total Liabilities 0

Contributed Capital 250

Earned Capital (Net Income) 20

Total Liabilities and Equity 270

● Cash: Rs. 150

(Initial Cash Rs. 50 + Sales Rs. 150 - Expenses Rs. 50)
● Inventory: Rs. 120
(Initial Inventory Rs. 200 - COGS Rs. 80)

Q1 Calculations

● Cost per Dress: Rs. 200 / 5 dresses = Rs. 40 per dress

● COGS for 2 Dresses: 2 dresses * Rs. 40 = Rs. 80
● Gross Profit: Sales Revenue Rs. 150 - COGS Rs. 80 = Rs. 70
● Net Income: Gross Profit Rs. 70 - Expenses Rs. 50 = Rs. 20

Question 2
The balance sheet of "Pure Joy" (a toy shop) for Period 1 is given. During Period 2, the following
transactions occurred:

● Sold on account inventories for Rs. 400 that cost Rs. 200.
● Collected Rs. 100 of accounts receivable from Period 1.
● Paid Rs. 50 of accounts payable from Period 1.
● Paid salaries in cash of Rs. 100.

a) Income Statement for Period 2 (Ignore Taxes)

Transactions during Period 2

1. Sales Revenue: Rs. 400

(Sold inventories on account)
2. Cost of Goods Sold (COGS): Rs. 200
(Cost of inventories sold)
3. Salaries Expense: Rs. 100
(Paid in cash)
 Income Statement Amount (Rs.)

Sales Revenue 400

Cost of Goods Sold 200

Gross Profit 200

Expenses (Salaries) 100

Net Income 100

b) Balance Sheet for Period 2

Balance Sheet for Periods 1 & 2

Balance Sheet Period 1 (Rs.) Period 2 (Rs.)

Cash 100 50

Accounts Receivable 200 500

Inventories 400 200

Total Assets 700 750

Accounts Payable 300 250

Total Liabilities 300 250

Contributed Capital 100 100

Earned Capital (Retained 300 400

Earnings)

Total Liabilities and Equity 700 750

Calculations:

● Cash: Rs. 50
(Beginning Cash Rs. 100 + Collected Receivables Rs. 100 - Paid Payables Rs. 50 - Salaries Rs.
100)
 ● Accounts Receivable: Rs. 500
(Beginning Receivables Rs. 200 + New Sales Rs. 400 - Collections Rs. 100)
● Inventories: Rs. 200
(Beginning Inventory Rs. 400 - COGS Rs. 200)
● Accounts Payable: Rs. 250
(Beginning Payables Rs. 300 - Payments Rs. 50)
● Earned Capital (Retained Earnings): Rs. 400
(Beginning Retained Earnings Rs. 300 + Net Income Rs. 100)

c) Cash Flow Statement for Period 2

Cash Flows from Operating Activities

Cash Flow Items Amount (Rs.)

Beginning Cash 100

Cash Inflows:

- Collected Accounts Receivable 100

Cash Outflows:

- Paid Accounts Payable 50

- Paid Salaries 100

Final Cash 50

● Net Decrease in Cash: Rs. 50

● Cash at the Beginning of the Period: Rs. 100
● Cash at the End of the Period: Rs. 50

Note: There were no cash flows from investing or financing activities during Period 2.

Question 2 Calculations

● Accounts Receivable End Balance:

○ Beginning AR Rs. 200 + Sales on Account Rs. 400 - Collections Rs. 100 = Rs. 500
● Accounts Payable End Balance:
○ Beginning AP Rs. 300 - Payments Rs. 50 = Rs. 250
● Inventory End Balance:
○ Beginning Inventory Rs. 400 - COGS Rs. 200 = Rs. 200
● Earned Capital (Retained Earnings) End Balance:
 ○ Beginning Retained Earnings Rs. 300 + Net Income Rs. 100 = Rs. 400
● Cash End Balance:
○ Beginning Cash Rs. 100 + Collections Rs. 100 - Payments to Suppliers Rs. 50 - Salaries
Paid Rs. 100 = Rs. 50

References
● Accounting Principles:
https://openstax.org/books/principles-financial-accounting/pages/2-1-describe-the-income-statem
ent-statement-of-owners-equity-balance-sheet-and-statement-of-cash-flows-and-how-they-interrel
ate
● Financial Statements Analysis: https://lendthrive.com/blog/retail-income-statement