Problem 17-4 (IAA) Forest Company provided the following information for the preparation of a statement of cash flows for the current year 2020 2019 Cash and cash equivalents Trading securities Accounts receivable, net of allowance Inventory Property, plant and equipment (net) Goodwill Discount on bonds payable 603,000 300,000 600,000 900,000 2,000,000 200,000 72,000 300,000 200,000 520,000 840,000 2,100,000 200,000 100,000 4,675,000 4,260,000 490,000 310,000 800,000 800,000 210,000 1,000,000 Accounts payable Accrued expenses Bonds payable Preference share capital, P100 par, each share convertible into two ordinary shares Ordinary share capital, P20 par Share premium Retained earnings 400,000 820,000 500,000 1,355,000 500,000 700,000 400,000 650,000 4,675,000 4,260,000 Additional information 1. Net income for the current year was P1,705,000. 2. Cash dividend paid during the year totaled P1,000,000. 3. The bonds mature on January 1, 2030. On December 31, 2020 bonds with face amount of P200,000 were retired at 105. Straight line amortization is used. 4. The entity sold 4,000 ordinary shares at P30 per share. 5. The decrease in preference share capital resulted from the exercise of the conversion privilege by preference shareholders. 6. The increase in trading securities is due to increase in market value during the year. Required: Prepare a statement of cash flows for the current year.
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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