CASE 2 The accountant for Batanes Company prepared the following income statement and retained earnings statement for the year ended December 31, 20x1: Batanes Corporation Income Statement For the Year Ended December 31, 20x1 Sales Revenue Less: Selling expenses Net Sales P1,568,000 (156,800) P1,411,200 18,400 25,600 P1,455,200 Add: Interest income Gain on sale of equipment Gross Sales Revenue Less: Cost of Operations Cost of goods sold Correction of overstatement in last year's income due to error (net of P13,200 income tax credit) Dividend costs (P4 per share) Loss due to earthquake Income before income tax Less: Income tax on income from P960,800 30,800 32,000 33,600 (1,057,200) P398,000 continuing operations Income after income tax Miscellaneous deductions: (99,840) P298,160 Loss from operations of discontinued segment XB (net of P7,200 income tax credit) Administrative expenses P16,800 (151,200) P146,960 134,400 Net income Batanes Corporation Retained Earnings Statement For the Year Ended December 31, 20x1 Retained Earnings, January 1, 20x1 Add: Gain on sale of segment XB (net of P10,800 income tax) P474,400 Net income Less: Interest expenses Retained Earnings, December 31, 20x1 25,200 146,960 (27,200) P619,360 The preceding account balances are correct but have been incorrectly classified in certain circumstances.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
- Income or loss from continuing and discontinued operations
- net income
retained earnings balance
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