s 40%. The company has not yet recorded its 2020 income tax expense and payable amounts so current-year tax effects may be ignored. Prior-year tax effects must be considere
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.
QUESTION 4
Ridley Corporation is in the process of adjusting and correcting its books at the end of
2020. In reviewing its records, the following information was discovered. Prepare the
The books are still open for 2020. The income tax rate is 40%. The company has not yet
recorded its 2020 income tax expense and payable amounts so current-year tax effects
may be ignored. Prior-year tax effects must be considered in item 4.
1. The company did not accrue sales commissions payable at the end of each of the last 2
years, as follows.
December 31, 2019 $19,000
December 31, 2020 $11,000
2. In reviewing the December 31, 2020, inventory, Ridley discovered errors in its
inventory taking procedures that have caused inventories for the last 3 years to be
incorrect, as follows.
December 31, 2018 Understated $16,000
December 31, 2019 Understated $19,000
December 31, 2020 Overstated $ 6,700
The company has already made an entry that established the incorrect December 31,
2020, inventory amount.
3. At December 31, 2020, Ridley decided to change the
equipment from double-declining-balance to straight-line. The equipment had an original
cost of $100,000 when purchased on January 1, 2018. It has a 10-year useful life and no
residual value. Depreciation expense recorded prior to 2020 under the double-decliningbalance method was $36,000. The company has already recorded 2020 depreciation
expense of $12,800 using the double-declining-balance method.
4. Before 2020, Ridley accounted for its income from long-term construction contracts on
the cost-recovery basis. Early in 2020, the company changed to the percentage-ofcompletion basis for accounting purposes. It continues to use the cost-recovery method
for tax purposes. Income for 2020 has been recorded using the percentage-of-completion
method.
Pretax Income from
Percentage-of-Completion Cost-Recovery
Prior to 2020 $150,000 $105,000
2020 60,000 20,000
5. A collection of $5,600 on account from a customer received on December 31, 2020,
was not recorded until January 2, 2021.
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