Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2020. Plant assets that had cost $20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300. During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share. Uncollectible accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts. The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash. A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cash equivalent basis for its cash flow statement. Patent amortization for the year was $20,000. The company exchanged common stock for a 70% interest in Tabasco Co. for $900,000. During the year, treasury stock costing $47,000 was purchased. Instructions State where each item is to be shown in the statement of cash flows, if at all.
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.
Each of the following items must be considered in preparing a statement of
- Plant assets that had cost $20,000 6 years before and were being
depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300. - During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share.
- Uncollectible
accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts. - The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash.
- A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cash equivalent basis for its cash flow statement.
- Patent amortization for the year was $20,000.
- The company exchanged common stock for a 70% interest in Tabasco Co. for $900,000.
- During the year,
treasury stock costing $47,000 was purchased.
Instructions
State where each item is to be shown in the statement of cash flows, if at all.
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