Case 3- Memorandum to an Executive Sweets Inc. made several capital purchases during the last month of the year. As part of the purchases the company sold some existing fixed assets. Yesterday, as you were walking to the company cafeteria, you saw the President of Sweets Inc. While walking with the President you mentioned that recent capital purchases would significantly impact the financial statements. Today, the President called you directly and asked you to write a memorandum explaining the impad of the capital purchases (and related sale of some existing fixed assets) on each of the following financial statements; Income Statement Balance Sheet Statement of Cash Flows Summary of December Capital Transactions On Dec. 1, 2021 Sweets Inc. purchased a new delivery truck for $ 100,000 The following addi tional information was provided: The truck was paid for with cash. The truck is expected to have a service life of 10 years. No salvage value is expected after the service life. The company uses straight-line depreciation for their financial reporting. On Dec. 1, 2021 Sweets Inc. purchased equipment for new production line $ 1,500,000 at the lowa Plant. The cost of the equipment was The following additional information was provided: The equipment was paid for with cash. The equipment has an expected service life of 20 years. $ 150,000 Salvage value atthe end of the service life is estimated to be The company uses straight-line depreciation for their financial reporting. The equipment was installed in December 15, 2021. The installation cost was Trial runs were also completed on December 15, 2021. The cost of the trial run was $ 50,000 $ 10,000
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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