Branson Electric prepared the following condensed income statements for two successive years. 2021 2020 Sales $ 4,000,000 $ 3,950,000 Cost of goods sold 1,550,000 900,000 Gross profit on sales $ 2,450,000 $ 3,050,000 Operating expenses 350,000 300,000 Net income $ 2,100,000 $ 2,750,000 At the end of 2020 (right-hand column), the inventory was understated by $23,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2021. The balance sheets for the two years showed owner’s equity of $390,000 at the end of 2020 and $490,000 at the end of 2021. (Branson is organized as a sole proprietorship and does not incur income taxes expense.) a. Compute the corrected net income figures for 2020 and 2021. b. Compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data. (Round "Gross profit percentage" to 2 decimal places (i.e. .1234 should be entered as 12.34))
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.
Branson Electric prepared the following condensed income statements for two successive years.
| 2021 | 2020 | ||||||
| Sales | $ | 4,000,000 | $ | 3,950,000 | |||
| Cost of goods sold | 1,550,000 | 900,000 | |||||
| Gross profit on sales | $ | 2,450,000 | $ | 3,050,000 | |||
| Operating expenses | 350,000 | 300,000 | |||||
| Net income | $ | 2,100,000 | $ | 2,750,000 | |||
At the end of 2020 (right-hand column), the inventory was understated by $23,000, but the error was not discovered until after the accounts had been closed and financial statements prepared at the end of 2021. The
a. Compute the corrected net income figures for 2020 and 2021.
b. Compute the gross profit amounts and the gross profit percentages for each year on the basis of corrected data. (Round "Gross profit percentage" to 2 decimal places (i.e. .1234 should be entered as 12.34))
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