Mastery Problem: Statement of Cash Flows Championship Boxing, Inc. Championship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the company’s new BOX-9000 computer has inadvertently erased parts of the company’s balance sheet, along with almost all related data except the company’s statement of cash flows. The IT department is working to retrieve earlier backups, but estimates that the reconstruction of the data will take about 24 hours. Unfortunately, financial statements are to be presented at a stockholders’ meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders’ meeting and give some introductory remarks. In addition to the statement of cash flows, the following data survived the computer mishap: The investments were sold for $280,000 cash. Equipment was acquired for $152,000 cash. Land was acquired for $326,000 cash. There were no disposals of equipment during the year. 12,500 shares of common stock were sold for cash during the year. There was a $96,000 debit to Retained Earnings for cash dividends declared. Statement of Cash Flows Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel. Championship Boxing, Inc. Statement of Cash Flows For the Year Ended December 31, 20Y8 Cash flows from (used for) operating activities: Net income $186,540 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 18,400 Gain on sale of investments (50,000) Changes in current operating assets and liabilities: Increase in accounts receivable (25,370) Increase in inventories (33,450) Increase in accounts payable 41,100 Decrease in accrued expenses payable (12,480) Net cash flow from operating activities $124,740 Cash flows from (used for) investing activities: Cash received from sale of investments $280,000 Cash paid for purchase of land (326,000) Cash paid for purchase of equipment (152,000) Net cash flow used for investing activities (198,000) Cash flows from (used for) financing activities: Cash received from sale of common stock $187,500 Cash paid for dividends (91,200) Net cash flow from financing activities 96,300 Net increase in cash $23,040 Cash balance, January 1, 20Y8 585,920 Cash balance, December 31, 20Y8 $608,960 Balance Sheet Using the information on above, complete the following comparative balance sheet. Championship Boxing, Inc. Comparative Balance Sheet December 31, 20Y8 and 20Y7 20Y8 20Y7 Assets Cash $fill in the blank 1 $585,920 Accounts receivable (net) 230,950 fill in the blank 2 Inventories fill in the blank 3 618,420 Investments 0 fill in the blank 4 Land fill in the blank 5 0 Equipment 705,120 fill in the blank 6 Accumulated depreciation-equipment (166,400) fill in the blank 7 Total assets $fill in the blank 8 $fill in the blank 9 Liabilities Accounts payable (merchandise creditors) $fill in the blank 10 $391,830 Accrued expenses payable (operating expenses) 41,150 fill in the blank 11 Dividends payable fill in the blank 12 19,200 Total liabilities $498,080 $fill in the blank 13 Stockholders' Equity Common stock, $4 par $fill in the blank 14 $100,000 Paid-in capital in excess of par fill in the blank 15 280,000 Retained earnings fill in the blank 16 fill in the blank 17 Total stockholders' equity $1,858,420 $fill in the blank 18 Total liabilities and stockholders' equity $fill in the blank 19 $fill in the blank 20 Feedback Review the relationships between the beginning and ending balance sheet amounts, and their effect on the statement of cash flows.
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.
Mastery Problem: Statement of
Championship Boxing, Inc.
Championship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the company’s new BOX-9000 computer has inadvertently erased parts of the company’s
Unfortunately, financial statements are to be presented at a stockholders’ meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders’ meeting and give some introductory remarks.
In addition to the statement of cash flows, the following data survived the computer mishap:
- The investments were sold for $280,000 cash.
- Equipment was acquired for $152,000 cash.
- Land was acquired for $326,000 cash.
- There were no disposals of equipment during the year.
- 12,500 shares of common stock were sold for cash during the year.
- There was a $96,000 debit to
Retained Earnings for cash dividends declared.
Statement of Cash Flows
Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel.
| Championship Boxing, Inc. Statement of Cash Flows For the Year Ended December 31, 20Y8 |
||||
| Cash flows from (used for) operating activities: | ||||
| Net income | $186,540 | |||
| Adjustments to reconcile net income to net cash flow from operating activities: | ||||
| |
18,400 | |||
| Gain on sale of investments | (50,000) | |||
| Changes in current operating assets and liabilities: | ||||
| Increase in |
(25,370) | |||
| Increase in inventories | (33,450) | |||
| Increase in accounts payable | 41,100 | |||
| Decrease in accrued expenses payable | (12,480) | |||
| Net cash flow from operating activities | $124,740 | |||
| Cash flows from (used for) investing activities: | ||||
| Cash received from sale of investments | $280,000 | |||
| Cash paid for purchase of land | (326,000) | |||
| Cash paid for purchase of equipment | (152,000) | |||
| Net cash flow used for investing activities | (198,000) | |||
| Cash flows from (used for) financing activities: | ||||
| Cash received from sale of common stock | $187,500 | |||
| Cash paid for dividends | (91,200) | |||
| Net cash flow from financing activities | 96,300 | |||
| Net increase in cash | $23,040 | |||
| Cash balance, January 1, 20Y8 | 585,920 | |||
| Cash balance, December 31, 20Y8 | $608,960 |
Balance Sheet
Using the information on above, complete the following comparative balance sheet.
| Championship Boxing, Inc. Comparative Balance Sheet December 31, 20Y8 and 20Y7 |
||||||
| 20Y8 | 20Y7 | |||||
| Assets | ||||||
| Cash | $fill in the blank 1 | $585,920 | ||||
| Accounts receivable (net) | 230,950 | fill in the blank 2 | ||||
| Inventories | fill in the blank 3 | 618,420 | ||||
| Investments | 0 | fill in the blank 4 | ||||
| Land | fill in the blank 5 | 0 | ||||
| Equipment | 705,120 | fill in the blank 6 | ||||
| (166,400) | fill in the blank 7 | |||||
| Total assets | $fill in the blank 8 | $fill in the blank 9 | ||||
| Liabilities | ||||||
| Accounts payable (merchandise creditors) | $fill in the blank 10 | $391,830 | ||||
| Accrued expenses payable (operating expenses) | 41,150 | fill in the blank 11 | ||||
| Dividends payable | fill in the blank 12 | 19,200 | ||||
| Total liabilities | $498,080 | $fill in the blank 13 | ||||
| Common stock, $4 par | $fill in the blank 14 | $100,000 | ||||
| Paid-in capital in excess of par | fill in the blank 15 | 280,000 | ||||
| Retained earnings | fill in the blank 16 | fill in the blank 17 | ||||
| Total stockholders' equity | $1,858,420 | $fill in the blank 18 | ||||
| Total liabilities and stockholders' equity | $fill in the blank 19 | $fill in the blank 20 |
Review the relationships between the beginning and ending balance sheet amounts, and their effect on the statement of cash flows.
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