Question 23 Waterway Industries has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Waterway Industries for 2019 and 2018 are provided below. BALANCE SHEETS Cash Accounts receivable Inventory Property, plant and equipment $610000 Less accumulated depreciation. (322000) Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Sales revenue Cost of sales Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before taxes Income taxes Net income The following additional data were provided: INCOME STATEMENT For the Year Ended December 31, 2019 $437000. $306000. The net cash provided by operating activities is Ⓒ$260000. 12/31/19 $410000 358000 383000 $222000. 288000 $1439000 $ 176000 354000 361000 215000 333000 $1439000 $598000 191000 $962000 (303000) $8410000 7151000 1259000 789000 470000 70000 400000 94000 $ 306000 1. Dividends for the year 2019 were $191000. 2. During the year equipment was sold for $242000. This equipment cost $354000 originally and had a book value of $268000 at the time of sale. The loss on sale was incorrectly charged to cost of sales. 3. All depreciation expense is in the selling expense category. 12/31/16 $ 190000 217000 481000 659000 $1547000 $ 95000 392000 600000 215000 245000 $1547000
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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