P5-2 Preparing the Statement of Cash Flows (Indirect Method) LO5-1, 5-2, 5-3, 5-5, 5-7 Selected financial information for Frank Corporation is presented below. Selected 2020 transactions are as follows: a. Purchased investment securities for $6,700 cash. b. Borrowed $18,400 on a two-year, 8 percent interest-bearing note. c. During 2020, sold machinery for its carrying amount; received $13,550 in cash. d. Purchased machinery for $53,400; paid $10,700 in cash and signed a four-year note payable to the dealer for $42,700. e. Declared and paid a cash dividend of $11,700 on December 31, 2020. Selected account balances at December 31, 2019 and 2020 are as follows: Cashi Accounts receivable Inventory Accounts payable Accrued wages payable Income taxes payable One-fourth of the sales and one-third of the purchases were made on credit. FRANK CORPORATION Statement of Earnings For the Year Ended December 31, 2020 Sales revenue Cost of sales Gross profit Expenses Salaries and wages December 31 2020 2019 $87,900 $22,700 18,700 12,850 53,700 63,400 8,700 13,400 1,650 2,700 6,700 3,850 Depreciation Rent (no accruals) Interest (no accruals) Income tax Total expenses Net earnings $52,700 10,900 7,500 13,900 13,500 $434,000 285,000 149,000 98,500 $ 50,500
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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