The balances below have been extracted from the accounting records of SUMMER LTD at 31 December 2016 DR, "000E CR, 000E Land 90 Equipment at cost 95 Equipment depreciation at 01.01.2016 13 Inventory at 01.01.2016 115 Trade receivables 86 Provision for doubtful debts Sales 1005 Purchases 730 Administrative expenses 176 Distribution costs 47 Prepayments at 31.12.2016 Accruals at 01.01.2016 Trade payables 6. 4. 59 Cash 36 10% Debentures 80 Interest Ordinary shares of 50c P'n'L account at 01.01.2016 150 17 Dividend 7. Share premium 53 Disposal proceeds 6. 1392 1392 You are given the following information: 1. Inventory at 31 December 2016 cost E120,000. This includes some damaged items which cost £7,000 and would normally be sold for £12,000 but after repair of £1,000 their expected price is only £10,000. 2. The land was purchased in 2004 and is presently used as a car park. Directors think that it should be revalued at a cost £150,000, but external independent valuators gave cost of £135,000. 3. During 31.12.2016 it was outlined that one client returned goods for total selling price of £7,000. The order had the following payment terms: 50% cash and 50% credit with repayment in Jan 2017. Returned goods were correctly included into closing stock and stock, but no other accounts were adjusted. 4. The company rents its premises. Rent is payable quarterly in advance on 1 March, 1 June, 1 September and 1 December. The annual rent was increased for year 2017 from E36,000 per annum to £48,000 per annum. Rent is included in Administrative expenses. 5. Equipment costing £15,000 purchased on 01.01.2014 was sold during 2016. No entries were provided except for cash. 6. Land is not depreciated. Equipment is depreciated on a straight-line basis over 4 years. 7. Accruals at 01.01.2016 relate to electricity. The accrual at 31.12.2016 is €7,000. Electricity is incuded in Administrative expenses. 8. A bad debt of £6,000 is to be written off. Provision for doubtful debts is set at level 3% of Trade Receivables. 9. The company expects to pay current year's corporation tax of ES,000 in March 2017 as well as full debentures' interest. 10. The company issued 50,000 additional ordinary shares on 30.12.2016. The proceeds of E40,000 were credited on a separate bank account. No entries have been made to accounting records. Required: (a) Prepare Income Statement for the year ended 31 December 2016 and Balance Sheet at that date. (b) Prepare Statement of changes in Equity for the year ended 31 December 2016
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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