For December 31, 20X1, the balance sheet of Baxter Corporation was as follows: Current Assets Liabilities Cash $ 24,000 Accounts payable $ 26,000 Accounts receivable 29,000 Notes payable 34,000 Inventory 39,000 Bonds payable 64,000 Prepaid expenses 13,400 Fixed Assets Stockholders’ Equity Gross plant and equipment $ 264,000 Preferred stock $ 34,000 Less: Accumulated depreciation (52,800) Common stock 69,000 Paid in Capital 39,000 Net plant and equipment $ 211,200 Retained earnings 50,600 Total assets $ 316,600 Total liabilities and stockholders’ equity $ 316,600
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.
For December 31, 20X1, the
| Current Assets | Liabilities | ||||
| Cash | $ | 24,000 | Accounts payable | $ | 26,000 |
| 29,000 | Notes payable | 34,000 | |||
| Inventory | 39,000 | Bonds payable | 64,000 | ||
| Prepaid expenses | 13,400 | ||||
| Fixed Assets | |||||
| Gross plant and equipment | $ | 264,000 | $ | 34,000 | |
| Less: |
(52,800) | Common stock | 69,000 | ||
| Paid in Capital | 39,000 | ||||
| Net plant and equipment | $ | 211,200 | 50,600 | ||
| Total assets | $ | 316,600 | Total liabilities and stockholders’ equity | $ | 316,600 |
Sales for 20X2 were $290,000, and the cost of goods sold was 55 percent of sales. Selling and administrative expense was $29,000. Depreciation expense was 12 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 8 percent, while the interest rate on the bonds payable was 16 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 40 percent.
$3,400 in preferred stock dividends were paid, and $6,156 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 8 percent. A new machine was purchased on December 31, 20X2, at a cost of $49,000.
Accounts payable increased by 30 percent. Notes payable increased by $7,400 and bonds payable decreased by $17,000, both at the end of the year. The preferred stock, common stock, and capital paid in excess of par accounts did not change.
a. Prepare an income statement for 20X2. (Round EPS answer to 2 decimal places.)
b. Prepare a statement of retained earnings for 20X2.
c. Prepare a balance sheet as of December 31, 20X2. (Amounts to be deducted should be indicated with parentheses or a minus sign.)
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