Indicate for each of the following what should be disclosed on a statement of cash flows (SCF) (indirect method). If not disclosed, select "Not shown." If an item is a noncash transaction that should be shown separately, select "noncash." If an item is added to net income, select "Add," and if an item is deducted from net income, select "Deduct." Show financing and investing outflows in parentheses. For example, an answer might be: Deduct $4,700 or Investing ($31,000). There is more than one answer for some items. Statement of Cash Flows (Indirect Method) Disclosure Effect on Net Income Effect on Cash Flows (a) For 2021, income before an extraordinary loss was $402,500. A tornado damaged a building and its contents. The proceeds from insurance companies totaled $118,500, which was $50,500 less than the book values. The tax rate was 30%. $ $ (b) Amortization of bond premium, $1,060. $ $ (c1) The balance in Retained Earnings was $874,500 on December 31, 2020 and $1,315,000 on December 31, 2021. Net income was $1,225,000. A stock dividend was declared and distributed which increased common stock $327,500 and paid-in capital $150,500. (For Stock Dividend) $ $ (c2) The balance in Retained Earnings was $874,500 on December 31, 2020 and $1,315,000 on December 31, 2021. Net income was $1,225,000. A stock dividend was declared and distributed which increased common stock $327,500 and paid-in capital $150,500. (For Cash Dividend) $ $ (d) Equipment, that cost $112,000 and had accumulated depreciation of $50,000, was sold for $68,000. $ $ (e) The deferred tax liability increased $19,500. $ $ (f) Issued 3,000 shares of preferred stock, $50 par, with a market value of $110 per share for land. (Show the amount also.)
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.
Indicate for each of the following what should be disclosed on a statement of
| Statement of Cash Flows (Indirect Method) | ||||||||||||
| Disclosure | Effect on Net Income | Effect on Cash Flows | ||||||||||
| (a) | For 2021, income before an extraordinary loss was $402,500. A tornado damaged a building and its contents. The proceeds from insurance companies totaled $118,500, which was $50,500 less than the book values. The tax rate was 30%. | $ | $ | |||||||||
| (b) | Amortization of bond premium, $1,060. | $ | $ | |||||||||
| (c1) | The balance in |
$ | $ | |||||||||
| (c2) | The balance in Retained Earnings was $874,500 on December 31, 2020 and $1,315,000 on December 31, 2021. Net income was $1,225,000. A stock dividend was declared and distributed which increased common stock $327,500 and paid-in capital $150,500. (For Cash Dividend) | $ | $ | |||||||||
| (d) | Equipment, that cost $112,000 and had |
$ | $ | |||||||||
| (e) | The |
$ | $ | |||||||||
| (f) | Issued 3,000 shares of |
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