Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31): 2021 2020 Sales revenue $ 5,350,000 $ 4,450,000 Cost of goods sold 3,050,000 2,190,000 Administrative expense 990,000 865,000 Selling expense 550,000 492,000 Interest revenue 169,000 159,000 Interest expense 238,000 238,000 Loss on sale of assets of discontinued component 124,000 — On July 1, 2021, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2021, for $124,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows: 1/1/2021–9/30/2021 2020 Sales revenue $ 590,000 $ 690,000 Cost of goods sold (385,000 ) (434,000 ) Administrative expense (69,000 ) (59,000 ) Selling expense (39,000 ) (39,000 ) Operating income before taxes $ 97,000 $ 158,000 In addition to the account balances above, several events occurred during 2021 that have not yet been reflected in the above accounts: A fire caused $69,000 in uninsured damages to the main office building. The fire was considered to be an unusual event. Inventory that had cost $59,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $6,000. Income taxes have not yet been recorded. Required: Prepare a multiple-step income statement for the Reed Company for 2021, showing 2020 information in comparative format, including income taxes computed at 25% and EPS disclosures assuming 700,000 shares of outstanding common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)
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.
Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31):
| 2021 | 2020 | |||
| Sales revenue | $ | 5,350,000 | $ | 4,450,000 |
| Cost of goods sold | 3,050,000 | 2,190,000 | ||
| Administrative expense | 990,000 | 865,000 | ||
| Selling expense | 550,000 | 492,000 | ||
| Interest revenue | 169,000 | 159,000 | ||
| Interest expense | 238,000 | 238,000 | ||
| Loss on sale of assets of discontinued component | 124,000 | — | ||
On July 1, 2021, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2021, for $124,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:
| 1/1/2021–9/30/2021 | 2020 | ||||||||
| Sales revenue | $ | 590,000 | $ | 690,000 | |||||
| Cost of goods sold | (385,000 | ) | (434,000 | ) | |||||
| Administrative expense | (69,000 | ) | (59,000 | ) | |||||
| Selling expense | (39,000 | ) | (39,000 | ) | |||||
| Operating income before taxes | $ | 97,000 | $ | 158,000 | |||||
In addition to the account balances above, several events occurred during 2021 that have not yet been reflected in the above accounts:
- A fire caused $69,000 in uninsured damages to the main office building. The fire was considered to be an unusual event.
- Inventory that had cost $59,000 had become obsolete because a competitor introduced a better product. The inventory was written down to its scrap value of $6,000.
- Income taxes have not yet been recorded.
Required:
Prepare a multiple-step income statement for the Reed Company for 2021, showing 2020 information in comparative format, including income taxes computed at 25% and EPS disclosures assuming 700,000 shares of outstanding common stock. (Amounts to be deducted should be indicated with a minus sign. Round EPS answers to 2 decimal places.)
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