As of January 1, Year 2, Room Designs, Incorporated had a balance of $5,200 in Cash, $2,850 in Common Stock, and $2,350 in Retained Earnings. These were the only accounts with balances in the ledger on January 1, Year 2. Further analysis of the company's cash account indicated that during the Year 2 accounting period, the company had (1) net cash inflow from operating activities of $5,450, (2) net cash outflow for investing activities of $13,700, and (3) net cash inflow from financing activities of $13,900. All revenue and expense events were cash events. The following accounts and balances represent the financial condition of Room Designs, Incorporated as of December 31, Year 2, before closing. Assets Cash Balance 10,850 Land Balance 13,700 ROOM DESIGNS INCORPORATED General Ledger + Liabilities Notes Payable Balance 6,500 Stockholders' Equity Common Stock Balance 11,850 Retained Earnings Balance 2,350 Revenue Balance 10,600 Expenses Balance 5,150 Dividends Balance 1,600 Required a. Assume that the net cash inflow from financing activities of $13,900 was caused by three events. Based on the given information, identify these events and determine the cash flow associated with each event. b. What did the company purchase that resulted in the cash outflow from investing activities? c-1. Prepare an income statement for the year ended December 31, Year 2.
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.
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