Mortonson Company has not yet prepared a statement of cash flows for the 2020 fiscal year. Comparative balance sheets as of December 31, 2019 and 2020, and a statement of income and retained earnings for the year ended December 31, 2020, are presented as follows. Mortonson Company Statement of Income and Retained Earnings For the Year Ended December 31, 2020 ($000 omitted) Sales revenue $3,800 Expenses Cost of goods sold $1,200 Salaries and benefits 725 Heat, light, and power 75 Depreciation 80 Property taxes 19 Patent amortization 25 Miscellaneous expenses 10 Interest 30 2,164 Income before income taxes 1,636 Income taxes 818 Net income 818 Retained earnings—Jan. 1, 2020 310 1,128 Stock dividend declared and issued 600 Retained earnings—Dec. 31, 2020 $ 528 Mortonson Company Comparative Balance Sheets As of December 31 ($000 omitted) Assets 2020 2019 Current assets Cash $ 333 $ 100 U.S. Treasury notes (available-for-sale) 10 50 Accounts receivable 780 500 Inventory 720 560 Total current assets 1,843 1,210 Long-term assets Land 150 70 Buildings and equipment 910 600 Accumulated depreciation—buildings and equipment (200) (120) Patents (less amortization) 105 130 Total long-term assets 965 680 Total assets $2,808 $1,890 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 420 $ 330 Income taxes payable 40 30 Notes payable 320 320 Total current liabilities 780 680 Long-term notes payable—due 2022 200 200 Total liabilities 980 880 Stockholders' equity Common stock 1,300 700 Retained earnings 528 310 Total stockholders' equity 1,828 1,010 Total liabilities and stockholders' equity $2,808 $1,890 Instructions Prepare a statement of cash flows using the direct method. Changes in accounts receivable and accounts payable relate to sales and cost of goods sold. Do not prepare a reconciliation schedule. (CMA adapted)
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.
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Mortonson Company
Statement of Income and Retained Earnings
For the Year Ended December 31, 2020
($000 omitted)
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Sales revenue
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$3,800
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Expenses
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Cost of goods sold
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$1,200
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Salaries and benefits
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725
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Heat, light, and power
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75
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80
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Property taxes
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19
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Patent amortization
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25
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Miscellaneous expenses
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10
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Interest
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30
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2,164
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Income before income taxes
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1,636
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Income taxes
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818
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Net income
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818
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Retained earnings—Jan. 1, 2020
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310
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1,128
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Stock dividend declared and issued
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600
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Retained earnings—Dec. 31, 2020
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$ 528
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Mortonson Company
Comparative Balance Sheets
As of December 31
($000 omitted)
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Assets
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2020
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2019
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Current assets
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Cash
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$ 333
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$ 100
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U.S. Treasury notes (available-for-sale)
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10
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50
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780
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500
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Inventory
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720
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560
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Total current assets
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1,843
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1,210
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Long-term assets
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Land
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150
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70
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Buildings and equipment
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910
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600
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(200)
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(120)
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Patents (less amortization)
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105
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130
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Total long-term assets
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965
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680
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Total assets
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$2,808
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$1,890
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Liabilities and
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Current liabilities
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Accounts payable
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$ 420
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$ 330
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Income taxes payable
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40
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30
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Notes payable
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320
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320
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Total current liabilities
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780
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680
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Long-term notes payable—due 2022
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200
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200
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Total liabilities
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980
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880
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Stockholders' equity
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Common stock
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1,300
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700
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Retained earnings
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528
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310
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Total stockholders' equity
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1,828
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1,010
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Total liabilities and stockholders' equity
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$2,808
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$1,890
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