he comparative balance sheets of Posner Company, for Years 1 and 2 ended December 31, appear below in condensed form: Year 2 Year 1 Assets Cash $ 53,000 $50,000 Accounts receivable (net) 37,000 48,000 Inventories 108,500 100,000 Investments - 70,000 Equipment 573,200 450,000 Accumulated depreciation—equipment (142,000) (176,000) Total assets $629,700 $542,000 Liabilities and Stockholders' Equity Accounts payable $ 62,500 $43,800 Bonds payable, due Year 2 - 100,000 Common stock, $10 par 325,000 285,000 Paid-in capital in excess of par—common stock 80,000 55,000 Retained earnings 162,200 58,200 Total liabilities and stockholders' equity $629,700 $542,000 The income statement for the current year is as follows: Sales $625,700 Cost of goods sold 340,000 Gross profit $285,700 Operating expenses: Depreciation expense $ 26,000 Other operating expenses 68,000 Total operating expenses 94,000 Income from operations $191,700 Other income: Gain on sale of investment $4,000 Other expense: Interest expense 6,000 (2,000) Income before income tax $189,700 Income tax 60,700 Net income $129,000 Additional data for the current year are as follows: Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200. Bonds payable for $100,000 were retired by payment at their face amount. 5,000 shares of common stock were issued at $13 for cash. Cash dividends declared and paid, $25,000. Prepare a statement of cash flow, using the indirect method of reporting cash flows from operating activities. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments. Posner Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: Cash from sale of investments $ Adjustments to reconcile net income to net cash flow from operating activities: Cash paid for dividends Gain on sale of investments Changes in current operating assets and liabilities: Net cash flow from operating activities $ Cash flows from investing activities: $ Net cash flow used for investing activities Cash flows from financing activities: $ Net cash flow used for financing activities $ Cash at the beginning of the year
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.
he comparative balance sheets of Posner Company, for Years 1 and 2 ended December 31, appear below in condensed form:
| Year 2 | Year 1 | |
| Assets | ||
| Cash | $ 53,000 | $50,000 |
| Accounts receivable (net) | 37,000 | 48,000 |
| Inventories | 108,500 | 100,000 |
| Investments | - | 70,000 |
| Equipment | 573,200 | 450,000 |
| (142,000) | (176,000) | |
| Total assets | $629,700 | $542,000 |
| Liabilities and |
||
| Accounts payable | $ 62,500 | $43,800 |
| Bonds payable, due Year 2 | - | 100,000 |
| Common stock, $10 par | 325,000 | 285,000 |
| Paid-in capital in excess of par—common stock | 80,000 | 55,000 |
| 162,200 | 58,200 | |
| Total liabilities and stockholders' equity | $629,700 | $542,000 |
The income statement for the current year is as follows:
| Sales | $625,700 | ||
| Cost of goods sold | 340,000 | ||
| Gross profit | $285,700 | ||
| Operating expenses: | |||
| Depreciation expense | $ 26,000 | ||
| Other operating expenses | 68,000 | ||
| Total operating expenses | 94,000 | ||
| Income from operations | $191,700 | ||
| Other income: | |||
| Gain on sale of investment | $4,000 | ||
| Other expense: | |||
| Interest expense | 6,000 | (2,000) | |
| Income before income tax | $189,700 | ||
| Income tax | 60,700 | ||
| Net income | $129,000 |
Additional data for the current year are as follows:
- Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200.
- Bonds payable for $100,000 were retired by payment at their face amount.
- 5,000 shares of common stock were issued at $13 for cash.
- Cash dividends declared and paid, $25,000.
Prepare a statement of cash flow, using the indirect method of reporting
| Posner Company | ||
| Statement of Cash Flows | ||
| For the Year Ended December 31, Year 2 | ||
| Cash flows from operating activities: | ||
| Cash from sale of investments | $ | |
| Adjustments to reconcile net income to net cash flow from operating activities: | ||
| Cash paid for dividends | ||
| Gain on sale of investments | ||
| Changes in current operating assets and liabilities: | ||
| Net cash flow from operating activities | $ | |
| Cash flows from investing activities: | ||
| $ | ||
| Net cash flow used for investing activities | ||
| Cash flows from financing activities: | ||
| $ | ||
| Net cash flow used for financing activities | ||
| $ | ||
| Cash at the beginning of the year |
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