REQUIRED 1. Prepare a schedule showing Pub’s income from Sub for the years 2019, 2020, and 2021. 2. Compute Pub’s net income for the years 2019, 2020, and 2021.
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.
Comparative income statements of Sub Corporation for the calendar years 2019, 2020, and
2021 are as follows (in thousands):
2019 2020 2021
Sales $22,000 $18,500 $19,250
Cost of sales 10,600 9,900 10,100
Gross profit 11400 8600 9150
Operating expenses 5,700 5,500 6,000
Net income $ 5700 $ 3100 $ 3150
ADDITIONAL INFORMATION
1. Sub was an 80 percent-owned subsidiary of Pub Corporation throughout the 2019–2021
period. Pub’s separate income (excludes income from Sub) was $7,200,000, $6,600,000, and
$7,500,000 in 2019, 2020, and 2021, respectively. Pub acquired its interest in Sub at its
underlying book value, which was equal to fair value on July 1, 2017.
2. Pub sold inventory items to Sub during 2019 at a gross profit to Pub of $720,000. Half the
merchandise remained in Sub’s inventory at December 31, 2019. Total sales by Pub to Sub in
2019 were $1,800,000. The remaining merchandise was sold by Sub in 2020.
3. Pub’s inventory at December 31, 2020, included items acquired from Sub on which Sub
made a profit of $410,000. Total sales by Sub to Pub during 2020 were $1,600,000.
4. There were no unrealized profits in the December 31, 2021 inventories of either Sub or
Pub.
5. Pub uses the equity method of accounting for its investment in Sub.
REQUIRED
1. Prepare a schedule showing Pub’s income from Sub for the years 2019, 2020, and 2021.
2. Compute Pub’s net income for the years 2019, 2020, and 2021.
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