Identifying the purpose and preparing the statement of cash flows—indirect method American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow: On January 1, 2018, ARC issued no par common stock for $450,000. Early in January, ARC made the following cash payments: For store fixtures, $53,000 For merchandise inventory, $340,000 For rent expense on a store building, $20,000 Later in the year, ARC purchased merchandise inventory on account for $239,000. Before year-end, ARC paid $139,000 of this accounts payable. During 2018, ARC sold 2,400 units of merchandise inventory for $275 each. Before year-end, the company collected 85% of this amount. The cost of goods sold for the year was $250,000, and the ending merchandise inventory totaled $329,000. The store employs three people. The combined annual payroll is $96,000, of which ARC still owes $3,000 at year-end. At the end of the year, ARC paid an income tax of $17,000. There are no income taxes payable. Late in 2018, ARC paid cash dividends of $44,000. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual value. Requirements What is the purpose of the statement of cash flows? Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together. Prepare ARC’s balance sheet on December 31, 2018. Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.
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.
Identifying the purpose and preparing the statement of
American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow:
- On January 1, 2018, ARC issued no par common stock for $450,000.
- Early in January, ARC made the following cash payments:
- For store fixtures, $53,000
- For merchandise inventory, $340,000
- For rent expense on a store building, $20,000
- Later in the year, ARC purchased merchandise inventory on account for $239,000. Before year-end, ARC paid $139,000 of this accounts payable.
- During 2018, ARC sold 2,400 units of merchandise inventory for $275 each. Before year-end, the company collected 85% of this amount. The cost of goods sold for the year was $250,000, and the ending merchandise inventory totaled $329,000.
- The store employs three people. The combined annual payroll is $96,000, of which ARC still owes $3,000 at year-end.
- At the end of the year, ARC paid an income tax of $17,000. There are no income taxes payable.
- Late in 2018, ARC paid cash dividends of $44,000.
- For store fixtures, ARC uses the
straight-line depreciation method , over five years, with zero residual value.
Requirements
- What is the purpose of the statement of cash flows?
- Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
- Prepare ARC’s
balance sheet on December 31, 2018. - Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.
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