Retained Earnings?

jp2code · #1 (**permalink**) 08-31-2010, 12:06 PM

This is a homework question (rather simple, it seems) that I can not get correct.

Quote:

Company A started business on April 1 with $7,500 cash contribution from its owners in exchange for common stock. The company used $2,225 of the cash for equipment for the new shop and $2,750 on games for its inventory. During the month, the company earned $4,275 of revenue in cash from the sale of the entire inventory. On April 30, the owners spent $3,000 cash on more games for the inventory. What is the retained earnings balance on April 30? How much cash does the company have on hand on April 30?

I am supposed to calculate the retained earnings for this fictitious company, and I get 3 tries to answer it. So far, I have gotten 2 answers wrong. One more incorrect answer and I'm out.

So, here are my financing "numbers":

$ 7,500 - common stock
$(2,225) - equipment
$(2,750) - games for inventory
$ 4,275 - earnings from sale of full inventory
$(3,000) - April 30: more games for the inventory

First Incorrect Response: (I did not read the question close enough, and used all of the values)

Code:

Start                7500
Equipment           (2225)
Inventory           (2750)
Sold Inventory       4275
More Inventory:_____(3000)
Retained Earnings    3800

Second Incorrect Response: (used an Income Statement example)

Code:

Revenue:
     Sales          4275
Expenses:
     Cost of Goods_(3000)
Net Income          1275

Obviously, I want to get this right, but I don't understand either.

If we are talking the retained earnings balance on April 30, do I include purchases made on April 30 (item #5)?
Do I deduct cash for equipment (item #2)?
Do I deduct for the games for inventory (item #3)?

For my third and final try, I'm thinking it could be one of the following:

#4 - #3:
Code:
```
$4,275 - $2,750 = $1,525
```
#4 - #3 - #5:
Code:
```
$4,275 - $2,750 - $3,000 = $-1,475
```

I don't know how to express negative numbers in the online flash application, though. The text book uses parenthesis, but I don't really want to burn my last choice on this guess.

I can't really answer this question with my current understanding of the topic.

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