Consultex, Inc., was founded in 2015 as a small financial consulting business. The company had done reasonably well in 2015-2017 but started noticing its cash dwindle early in 2018. In January 2018, Consultex had paid $16,500 to purchase land and repaid $2,000 principal on an existing promissory note. In March, the company paid $2,100 cash for dividends and $1,100 to repurchase and eliminate Consultex stock that had previously been issued for $1,100. To improve its cash position, Consultex borrowed $5,100 by signing a new promissory note in May and also issued stock to a new private investor for $12,100 cash. Year-end comparative balance sheets and income statements are presented below. CONSULTEX, INC. Balance Sheet October 31 2018 2017 Assets Cash $ 9,850 $13,300 14,200 2,050 27,500 12,100 3,100 11,000 Accounts Receivable Prepaid Rent Land Total Assets $53,600 $39,500 Liabilities and Stockholders' Equity Salaries and Wages Payable Income Taxes Payable Notes Payable (long-term) $ 2,050 $ 3,100 1,100 12,100 9,100 14,100 1,100 15,200 20,100 Common Stock Retained Earnings 15,150 Total Liabilities and Stockholders' Equity $53,600 $39,500 CONSULTEX, INC. Income Statement For the Year Ended October 31 2017 $158,500 $161,500 97,100 30,100 20,100 14,200 4,260 9,940 2018 Sales Revenue Salaries and Wages Expense Rent Expense Utilities Expenses Income before Income Tax Expense Income Tax Expense 98,100 36,100 19,800 4,500 1,350 $ 3,150 $ Net Income
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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