Anne Marie is the owner of Anne’s Beauty Salon, Inc. Her accountant prepares a monthly financial statement for her business. She doesn’t like to ask him questions about it. She would rather ask you

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Anne Marie is the owner of Anne’s Beauty Salon, Inc.  Her accountant prepares a monthly financial statement for her business.  She doesn’t like to ask him questions about it.  She would rather ask you as you are her friend and since she knows that you are taking an accounting course, she asks you the following questions:

  1. What does net income mean on the income statement?  If I have enough cash at the end of the month then I assume I made money.  This concept of net income seems complicated.
  2. My accountant told me that the balance sheet shows assets = liabilities plus equity.  What does that mean?
  3. I don’t understand what the Statement of Retained Earnings is all about.  What is retained earnings?

How would you respond to each of these questions?