Early in the year 2014, John Roberts, a recent graduate of Southeast State College, delivers the financial statements shown below to Laura Dennis of Dennis, Inc. After a quick review, Dennis exclaims, "What do you mean I had net income of $20,000? I borrowed $40,000 from the bank and my cash balance decreased by $2,000. I must have had a loss! Some accountant you are!" How should Mr. Roberts answer Ms. Dennis?

Dennis, Inc.

Comparative Balance Sheet

December 31, 2013 and 2012

........................................................................ 2013 ............................ 2012

Assets

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 ........................ $ 5,000

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 ........................... 8,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 ......................... 15,000

Equipment (at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 ......................... 20,000

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . (10,000) ........................ (5,000)

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,000 ..................... $43,000

Liabilities and Stockholders' Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 ..................... $ 9,000

Notes payable-long-term . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 ........................... -

Common stock, $1 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 ......................... 2,000

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 ....................... 18,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 ....................... 14,000

Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 83,000 .................. $ 43,000

Dennis, Inc.

Combined Statement of Income and Retained Earnings

For the Year Ended December 31, 2013

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000

Operating expenses (including depreciation of $5,000) . . . . . . . . . . . . 70,000 . . . . . 220,000

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 20,000

Add: Retained earnings, January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000

Deduct: Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,000)

Retained earnings, December 31, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,000