Required: Prepare a statement of cash flows for 2020 using the direct method to report cash inflows and outflows from operating activities. (List any deduction in cash and cash outflows as negative amounts.)
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.
![ICE Drilling Inc.'s balance sheet information and income statement are as follows:
ICE Drilling Inc.
Income Statement
For Year Ended December 31, 2020
Sales
Cost of goods sold
Gross profit
Operating expenses:
Depreciation expense
Other expenses
$1,111,800
561,000
550,800
$ 43,000
305,960
Total operating
expenses
Profit from operations
Loss on sale of
equipment
Profit before taxes
Income taxes
Profit
348,960
$ 201,840
11,680
$ 190,160
27,360
$ 162,800
ICE Drilling Inc.
Comparative Balance Sheet Information
December 31
2020
2019
Cash
$121,680 $172,640
Accounts receivable
146,600
112,160
Merchandise inventory
614,200
566,600
Prepaid expenses
12,050
15,000
Equipment
357,480
247,400
Accumulated
depreciation
78,560
99,560
Accounts payable
196,610
259,440
Current notes payable
23,400
15,000
Notes payable
210,000
120,600
Common shares
451,800 351,000
Retained earnings
291,640
268,200
Additional information regarding ICE Drilling's activities during 2020:
1. Loss on sale of equipment is $11,680.
2. Paid $70,480 to reduce a long-term note payable.
3. Equipment costing $106,000, with accumulated depreciation of $64,000, is sold for cash.
4. Equipment costing $216,080 is purchased by paying cash of $56,200 and signing a long-term note payable for the
balance.
5. Borrowed $8,400 by signing a short-term note payable.
6. Issued 10,080 common shares for cash at $10 per share.
7. Declared and paid cash dividends of $139,360.
Other information:
a. All sales are credit sales.
b. All credits to accounts receivable in the period are receipts from customers.
c. Purchases of merchandise are on credit.
d. All debits to accounts payable in the period result from payments for merchandise.
e. The only decrease in income taxes payable is for payment of taxes.
f. The other expenses are paid in advance and are initially debited to Prepaid Expenses.
Required:
Prepare a statement of cash flows for 2020 using the direct method to report cash inflows and outflows from operating
activities. (List any deduction in cash and cash outflows as negative amounts.)
Answer is not complete.
ICE DRILLING INC.
Statement of Cash Flows
For Year Ended December 31, 2020
Cash flows from operating activities:
Cash received from customers
Cash paid for other expenses
Cash paid for income taxes
Cash paid for merchandise
inventory
$
172,640
Net cash inflow from operating
activities
$
172,640
Cash flows from investing activities:
0
Cash flows from financing activities:
0
$
172,640
$
172,640](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F591c9877-1855-48a6-911e-a60e8324fb24%2Ff9356a68-e5fe-4712-8f97-d8cbc37de7ee%2F07dsu4p_processed.png&w=3840&q=75)
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