Appendix 2PR 13-4B Statement of cash flows—direct method The comparative balance sheet of Martinez Inc. for December 31, 20Y4 and 20Y3, is as follows:Dec. 31, 20Y4Dec. 31, 20Y3AssetsCash .....................................................$ 661,920$ 683,100Accounts receivable (net) .................................. 992,640 914,400Inventories ...............................................1,394,4001,363,800Investments ..............................................0432,000Land ..................................................... 960,0000Equipment................................................1,224,000 984,000Accumulated depreciation—equipment ....................(481,500)(368,400)Total assets ...............................................$4,751,460$4,008,900Liabilities and Stockholders’ EquityAccounts payable (merchandise creditors) ..................$1,080,000$ 966,600Accrued expenses payable (operating expenses) ............67,80079,200Dividends payable.........................................100,80091,200Common stock, $5 par .................................... 130,000 30,000Paid-in capital in excess of par—common stock................. 950,000 450,000Retained earnings.........................................2,422,8602,391,900Total liabilities and stockholders’ equity.....................$4,751,460$4,008,900 The income statement for the year ended December 31, 20Y3, is as follows:Sales .....................................................$ 4,512,000Cost of goods sold......................................... (2,352,000)Gross profit ...............................................$ 2,160,000Operating expenses:Depreciation expense ..................................$ 113,100Other operating expenses .............................. 1,344,840Total operating expenses ............................ (1,457,940)Operating income.........................................$ 702,060Other revenue:Gain on sale of investments............................. 156,000Income before income tax .................................$ 858,060Income tax expense ....................................... (299,100)Net income ...............................................$ 558,960Additional data obtained from an examination of the accounts in the ledger for 20Y3 are as follows:a. Equipment and land were acquired for cash.b. There were no disposals of equipment during the year.c. The investments were sold for $588,000 cash.d. The common stock was issued for cash.e. There was a $528,000 debit to Retained Earnings for cash dividends declared.Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operat-ing activities.
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.
Appendix 2PR 13-4B Statement of
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