Exercise no. 2 During the first part of the current year, Luzon Inc. begins a branch operation in Iloilo City. Equipment costing P 50,000is immediately sent to this site. In addition, inventory costing P 40,000 is transferred but at a price of P 60,000. Cash of P 10,000 also is conveyed to the branch. The following events occur thereafter: The branch inventory from an outside party at a cost of P 30,000. A periodic inventory system is in use. The home office pays P 10,000 on a building for the next eight months. The branch is notified of this payment. Sales of P 90,000 are made. Cash of P 40,000 is collected immediately. The rest of the sales are made on account. ● a. ● • • ● The branch pays P 8,000 for advertising and another P 5,000 for salaries. The branch transfers P 10,000 in cash to the home office. The money is received and recorded. A P 3,000 receivable is collected by the home office for the branch. The branch is notified of this collection. The building rented by the branch is occupied for four months. Required: a. Prepare Journal entries for the Branch and Home Office books. b. Prepare the Income statement of Iloilo branch. Branch Books Equipment Shipment from home office Cash Home office Purchases Cash or accounts payable Prepaid rent Home office Cash Accounts receivable Sales Advertising expense Salary expense Cash Home office Cash Home office Accounts receivable ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
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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