Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows. Net Income Dividends Declared 2017 $ 40,000 $ –0– 2018 125,000 50,000 2019 160,000 50,000 The following information relates to 2020. Income before income tax $240,000 Prior period adjustment: understatement of 2018 depreciation expense (before taxes) $ 25,000 Cumulative decrease in income from change in inventory methods (before taxes) $ 35,000 Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2021) $100,000 Effective tax rate 20% Instructions a. Prepare a 2020 retained earnings statement for Eddie Zambrano Corporation. b. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of $70,000 on December 31, 2020. After this action, what would Zambrano report as total retained earnings in its December 31, 2020, balance sheet?
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.
Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows.
| Net Income | Dividends Declared | |||
| 2017 | $ 40,000 | $ –0– | ||
| 2018 | 125,000 | 50,000 | ||
| 2019 | 160,000 | 50,000 |
The following information relates to 2020.
| Income before income tax | $240,000 |
| Prior period adjustment: understatement of 2018 |
$ 25,000 |
| Cumulative decrease in income from change in inventory methods (before taxes) | $ 35,000 |
| Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2021) | $100,000 |
| Effective tax rate | 20% |
Instructions
a. Prepare a 2020
b. Assume Eddie Zambrano Corporation restricted retained earnings in the amount of $70,000 on December 31, 2020. After this action, what would Zambrano report as total retained earnings in its December 31, 2020,
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