Comparative income statements of Samba Corporation for the calendar years 2017, 2018, and 2019 are as follows (in thousands): 2017 2018 2019 Sales $14,000 $16,250 $16,850 Cost of Sales 8,100 8,900 9,100 Gross Profit 5,900 7,150 7,750 Operating Expenses 4,700 5,500 6,000 Net Income 1,200 1,650 1,750
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.
Comparative income statements of Samba Corporation for the calendar years 2017, 2018, and 2019 are as follows (in thousands):
| 2017 | 2018 | 2019 | |
| Sales | $14,000 | $16,250 | $16,850 |
| Cost of Sales | 8,100 | 8,900 | 9,100 |
| Gross Profit | 5,900 | 7,150 | 7,750 |
| Operating Expenses | 4,700 | 5,500 | 6,000 |
| Net Income | 1,200 | 1,650 | 1,750 |
ADDITIONAL INFORMATION
1. Samba was a 75 percent-owned subsidiary of Pamba Corporation throughout the 2017– 2019 period. Pamba’s separate income (excludes income from Samba) was $6,400,000, $5,600,000, and $7,000,000 in 2017, 2018, and 2019, respectively. Pamba acquired its interest in Samba at its underlying book value, which was equal to fair value on July 1, 2016.
2. Pamba sold inventory items to Samba during 2017 at a gross profit to Pamba of $650,000. Half the merchandise remained in Samba’s inventory at December 31, 2017. Total sales by Pamba to Samba in 2017 were $1,600,000. The remaining merchandise was sold by Samba in 2018.
3. Pamba’s inventory at December 31, 2018, included items acquired from Samba on which Samba made a profit of $350,000. Total sales by Samba to Pamba during 2018 were $1,400,000.
4. There were no unrealized profits in the December 31, 2019, inventories of either Samba or Pamba.
5. Pamba uses the equity method of accounting for its investment in Samba.
REQUIRED
1. Prepare schedule showing Pamba’s income from Samba for the years 2017, 2018, and 2019.
2. Compute Pamba’s net income for the years 2017, 2018, and 2019.
3. Prepare schedule of consolidated net income for Pamba Corporation and Subsidiary for the years 2017, 2018, and 2019, beginning with the separate incomes of the two affiliates and including noncontrolling interest computations.
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Why wasn't the $1,400,000 sale by samba to pamba subtracted from the net income of Pamba in 2018?
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