Assume an income statement with the following classifications: Exercise 3 A. Revenues B. Cost of goods sold C. Distribution expenses D. General and administrative expenses E. Other revenues and expenses F. Income tax on income from continuing operations. G. Gain from disposal of discontinued operations H. Income tax on gain from discontinued operations 1 None of the above Indicate by letter how each of the following should be classified: 1. Advertising expense 2. Amortization of a patent held as an investment 3. Cash dividend received on short-term investment 4. Depreciation on plant that manufactures goods for sale (prior to sale of the goods) 5. Freight on sales 6. Income tax effect of loss on sale of plant 7. Income tax on gain on sale of short-term investment in securities 8. Interest expense 9. Interest revenue 10. Loss on sale of patent 11. Dividend revenue from investments 12. Salary of company president 13. Sales 14. Sales returns 15. Services sold
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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