Prepare a statement of changes in stockholders' equity for Year 2.
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.
The
| Cash | $ | 8,500 | |
| Land | 4,000 | ||
| Notes Payable | 5,000 | ||
| Common Stock | 6,000 | ||
| 1,500 | |||
During Year 2, Pacilio Security Services experienced the following transactions:
- Acquired an additional $2,000 from the issue of common stock.
- Paid $3,000 on the debt owed to the Small Business Government Agency. The loan is interest-free.
- Performed $21,000 of security services for numerous local events during the year; $15,000 was on account and $6,000 was cash.
- On May 1, rented a small office building. Paid $2,400 for 12 months’ rent in advance.
- Purchased supplies on account for $650.
- Paid salaries expense for the year of $8,000.
- Incurred other operating expenses on account, $6,200.
- On September 1, Year 2, a customer paid $600 for services to be provided over the next six months.
- Collected $13,500 of
accounts receivable during the year. - Paid $5,800 on accounts payable.
- Paid $1,500 of advertising expenses for the year.
- Paid a cash dividend to the shareholders of $1,000.
- The market value of the land was determined to be $5,000 at December 31, Year 2.
Information for Adjustments
- There was $65 of supplies on hand at the end of the year.
- Recognized the expired rent.
- Recognized the revenue earned from Transaction 8.
- Accrued salaries were $1,200 at December 31, Year 2.
Required
a. Show the effects of the events on the financial statements using a horizontal statements model given below. In the
b. Prepare an income statement, statement of changes in
c. Indicate whether the transaction increases (+), decreases (–), or increases and decreases (+/-) for each element of the financial statements. Also, in the Cash Flow column, use the letters OA to designate operating activity, IA for investing activity, FA for financing activity. The first transaction is recorded as an example.
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