Carleton Builders Ltd. recorded the following summarized transactions during the current year:a. The company originally sold and issued 108,000 common shares. During the current year 10,000 shares were repurchased from the shareholders and retired. Near the end of the current year, the board of directors declared and paid a cash dividend of $9 per share. The dividend was recorded as follows: General Journal Debit Credit Retained earnings 972,000 Cash ($9 × 98,000) 882,000 Dividend income ($9 × 10,000) 90,000 Carleton Builders Ltd. purchased a machine that had a list price of $98,000. The company paid for the machine in full by issuing 10,000 common shares (market price = $8.90). The purchase was recorded as follows: General Journal Debit Credit Machine 98,000 Share capital ($8.90 × 10,000) 89,000 Gain on purchase of equipment 9,000 Carleton needed a small structure for temporary storage. A contractor quoted a price of $777,000. The company decided to build the structure itself. The cost was $546,000, and construction required three months. The following entry was made: General Journal Debit Credit Buildings—warehouse 777,000 Cash 546,000 Revenue from self-construction 231,000 Carleton owns a plant located on a river that floods occasionally. A severe flood occurred during the current year, causing an uninsured loss of $95,000 (measured as the amount spent to repair the flood damage). The following entry was made: General Journal Debit Credit Retained earnings, flood loss 95,000 Cash 95,000 On 28 December, the company collected $73,000 cash in advance for merchandise to be shipped in January. The company’s fiscal year-end is 31 December. This transaction was recorded on 28 December as follows: General Journal Debit Credit Cash 73,000 Sales revenue 73,000 Required:For each transaction, select which accounting principle was violated.
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.
Carleton Builders Ltd. recorded the following summarized transactions during the current year:
a. The company originally sold and issued 108,000 common shares. During the current year 10,000 shares were repurchased from the shareholders and retired. Near the end of the current year, the board of directors declared and paid a cash dividend of $9 per share. The dividend was recorded as follows:
|
General Journal |
Debit |
|
Credit |
|
|
972,000 |
|
|
|
Cash ($9 × 98,000) |
|
|
882,000 |
|
Dividend income ($9 × 10,000) |
|
|
90,000 |
Carleton Builders Ltd. purchased a machine that had a list price of $98,000. The company paid for the machine in full by issuing 10,000 common shares (market price = $8.90). The purchase was recorded as follows:
|
General Journal |
Debit |
|
Credit |
|
Machine |
98,000 |
|
|
|
Share capital ($8.90 × 10,000) |
|
|
89,000 |
|
Gain on purchase of equipment |
|
|
9,000 |
Carleton needed a small structure for temporary storage. A contractor quoted a price of $777,000. The company decided to build the structure itself. The cost was $546,000, and construction required three months. The following entry was made:
|
General Journal |
Debit |
|
Credit |
|
Buildings—warehouse |
777,000 |
|
|
|
Cash |
|
|
546,000 |
|
Revenue from self-construction |
|
|
231,000 |
Carleton owns a plant located on a river that floods occasionally. A severe flood occurred during the current year, causing an uninsured loss of $95,000 (measured as the amount spent to repair the flood damage). The following entry was made:
|
General Journal |
Debit |
|
Credit |
|
Retained earnings, flood loss |
95,000 |
|
|
|
Cash |
|
|
95,000 |
On 28 December, the company collected $73,000 cash in advance for merchandise to be shipped in January. The company’s fiscal year-end is 31 December. This transaction was recorded on 28 December as follows:
|
General Journal |
Debit |
|
Credit |
|
Cash |
73,000 |
|
|
|
Sales revenue |
|
|
73,000 |
Required:
For each transaction, select which accounting principle was violated.
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