Instructions: Prepare a statement of cash flows for Lowz Company using the direct method. The financial statements of Lowz Company appear below: LOWZ COMPANY Comparative Balance Sheet December 31 2014 2013 Assets Cash $ 36,000 $ 23,000 Accounts receivable 25,000 34,000 Merchandise inventory 32,000 15,000 Property, plant, and equipment 50,000 78,000 Accumulated depreciation (21,000) (24,000) Total $122,000 $126,000 Liabilities and Stockholders' Equity Accounts payable $ 18,000 $ 23,000 Income taxes payable 9,000 8,000 Bonds payable 8,000 33,000 Common stock 28,000 24,000 Retained earnings 59,000 38,000 Total $122,000 $126,000 LOWZ COMPANY Income Statement For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 270,000 Gross profit 130,000 Depreciation Expense 8,000 Operating expenses 37,000 Income from operations 85,000 Interest expense 5,000 Income before income taxes 80,000 Income tax expense 24,000 Net income $ 56,000 The following additional data were provided: During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.
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.
Instructions: Prepare a statement of
The financial statements of Lowz Company appear below:
LOWZ COMPANY
Comparative
December 31
2014 2013
Assets
Cash $ 36,000 $ 23,000
Merchandise inventory 32,000 15,000
Property, plant, and equipment 50,000 78,000
Total $122,000 $126,000
Liabilities and
Accounts payable $ 18,000 $ 23,000
Income taxes payable 9,000 8,000
Bonds payable 8,000 33,000
Common stock 28,000 24,000
Total $122,000 $126,000
LOWZ COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales $400,000
Cost of goods sold 270,000
Gross profit 130,000
Depreciation Expense 8,000
Operating expenses 37,000
Income from operations 85,000
Interest expense 5,000
Income before income taxes 80,000
Income tax expense 24,000
Net income $ 56,000
The following additional data were provided:
- During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.
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