If Carlisle Clinic reports an equity balance of $1 million on its balance sheet, what was its equity balance one year prior, given a net income of $200,000?

To determine Carlisle Clinic's equity balance one year prior, you must consider how net income impacts equity over a period. The equity at the end of the year is the starting equity (equity from the previous year) plus the net income for that year.

Given that the equity balance now is $1 million and the net income for the year is $200,000, we can use the formula:

Ending Equity = Beginning Equity + Net Income

Rearranging this gives us:

Beginning Equity = Ending Equity - Net Income

Substituting the known values:

Beginning Equity = $1,000,000 - $200,000 = $800,000

This calculation shows that the equity balance one year prior was indeed $800,000. This is the correct reasoning behind determining the previous year’s equity considering the growth due to net income.