Exercise 21-27 (Algo) Statement of cash flows; direct method [LO21-3, 21-5, 21-6, 21-8] Comparative balance sheets for 2021 and 2020, a statement of Income for 2021, and additional Information from the accounting ecords of Red, Inc., are provided below. RED, INC. Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions) 2021 Assets Cash Accounts receivable Prepaid insurance Inventory Buildings and equipment Less: Accumulated depreciation Liabilities Accounts payable Accrued liabilities Notes payable Bonds payable Shareholders' Equity Common stock Retained earnings Revenues sales revenue Expenses Cost of goods sold Depreciation expense Operating expenses Net income $ 40 200 12 300 432 (135) $1,467 41 601 $ 849 $ 103 11 66 189 RED, INC. Statement of Income For Year Ended December 31, 2021 ($ in millions) 416 64 $ 849 $2,200 2,109 $ 91 2020 $ 148 148 9 191 366 (256) $ 606 $ 132 19 e 0 416 39 $ 606 Additional Information from the accounting records: a. During 2021, $246 million of equipment was purchased to replace $180 million of equipment (90% depreciated) sold at book value. . In order to maintain the usual policy of paying cash dividends of $66 million, it was necessary for Red to borrow $66 million from its bank.
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.
![**Exercise 21-27 (Algo) Statement of Cash Flows; Direct Method [LO21-3, 21-5, 21-6, 21-8]**
This exercise involves preparing a statement of cash flows for Red, Inc. using the direct method. Presented are comparative balance sheets for 2021 and 2020, a statement of income for 2021, and additional accounting information.
**Comparative Balance Sheets:**
The balance sheets for December 31, 2021, and 2020 are shown in millions of dollars.
**Assets:**
- **Cash:**
- 2021: $40
- 2020: $148
- **Accounts Receivable:**
- 2021: $200
- 2020: $148
- **Prepaid Insurance:**
- 2021: $12
- 2020: $9
- **Inventory:**
- 2021: $300
- 2020: $191
- **Buildings and Equipment:**
- 2021: $432
- 2020: $366
- **Less: Accumulated Depreciation:**
- 2021: $(135)
- 2020: $(256)
**Liabilities:**
- **Accounts Payable:**
- 2021: $183
- 2020: $132
- **Accrued Liabilities:**
- 2021: $11
- 2020: $19
- **Notes Payable:**
- 2021: $66
- 2020: $0
- **Bonds Payable:**
- 2021: $189
- 2020: $0
**Shareholders’ Equity:**
- **Common Stock:**
- 2021: $416
- 2020: $416
- **Retained Earnings:**
- 2021: $64
- 2020: $39
**Statement of Income for Year Ended December 31, 2021:**
- **Sales Revenue:** $2,200 million
- **Expenses:**
- **Cost of Goods Sold:** $1,467
- **Depreciation Expense:** $41
- **Operating Expenses:** $601](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff47b5d26-30f7-46ec-8326-db865c869990%2F6acb157d-2cdc-48e4-8aed-5d698fc4f21a%2Fcr08jz7_processed.png&w=3840&q=75)
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