This is an exercise on the relationships between assets, liabilities, and ownership equities. The numbers are small, but the underlying concepts are large.
1. Assume an opening balance sheet of
Cash ............. $1,000
Paid-in capital ......... $1,000
2. Purchase inventory for $600 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. What does retained earnings represent and how is it related to other balance sheet accounts? Explain in your own words.
4. Buy inventory for $300 cash and equipment for $800 cash. Prepare a balance sheet. What does retained earnings represent and how is it related to other balance sheet accounts? Explain in your own words.
5. Buy inventory for $500 on open account. Prepare a balance sheet. What do retained earnings and account payable represent and how are they related to other balance sheet  accounts? Explain in your own words.