Question: Nature of Retained Earnings This is an exercise on the relationships among assets, liabilities, and ownership equities.
1. Prepare an opening balance sheet of
Cash $1,000
Paid-in-capital $1,000
2. Purchase inventory for $500 cash. Prepare a balance sheet. A heading is unnecessary in this and subsequent requirements.
3. Sell the entire inventory for $850 cash. Prepare a balance sheet. Where is the retained earnings in terms of relationships within the balance sheet? That is, what is the meaning of the retained earnings? Explain in your own words.
4. Buy inventory for $400 cash and equipment for $750 cash. Prepare a balance sheet. Where is the retained earnings in terms of relationships within the balance sheet? That is, what is the meaning of the retained earnings? Explain in your own words.
5. Buy inventory for $350 on open account. Prepare a balance sheet. Where is the retained earnings and account payable in terms of the relationships within the balance sheet? That is, what is the meaning of the account payable and the retained earnings? Explain in your own words.