The comparative balance sheet and income statement of Sign Language Hearing Co Ltd, have just been prepared and presented to the owners by the company’s Accountant. The owners are concerned about the movement in the company’s cash and cash equivalent given that the balance sheet does not show or explain the reason or reasons why there was an increase or decrease in this area. The company uses the indirect method to prepare the statement of cash flows and it is expected that this should be able to provide the needed clarity required by the owners. The owners have asked each student from your accounting course to assist with the needed clarification and have put forward the following financial information grouped according to your surname initial. Financial info to be used by surnames with initials (N, B, J, X, H) Sign Language Hearing Co Ltd Comparative Balance Sheet October 31, 2020, and 2021 2021 2020 Assets Cash and cash equivalent 350,000 450,000 Accounts Receivable 440,850 - Inventory 225,222 315,898 Prepaid expenses 185,000 185,000 Equipment, net 668,500 495,880 Total Assets 1,869,572 1,446,778 Liabilities Accounts payable - 198,500 Accrued liabilities 225,550 190,545 Bond payable 555,840 365,520 Stockholders' Equity: Common Stock 245,600 145,600 Retained earnings 1,037,582 711,613 Treasury stock (195,000) (165,000) Total liabilities and stockholders' equity 1,869,572 1,446,778 Sign Language Hearing Co Ltd Income Statement Year Ended October 31,2021 Revenues and gains: Sales revenue 1,500,000 Gain on sale of equipment 28,000 Interest revenue Total revenues and gains 1,528,000 Expenses Cost of goods sold 704,500 Salary expense 185,000 Depreciation expense 40,000 Rent expense 200,000 Total expenses 1,129,500 Income before income taxes 398,500 Income tax expense 44,500 Net Profit 354,000 Notes Purchase of equipment 337,620 Cash receipt from sale of equipment 153,000 Issuance of bonds payable to borrow cash 190,320 Cash receipt from issuance of common stock 100,000 Dividend paid 28,031 Book value of equipment sold 125,000 Purchase of treasury stock 30,000 Requirements In comparison to investing and financing activities, it is often said that cash from operating activities must be the main source of cash to achieve long term success of the company. Do you agree or disagree with this statement? In your own words, give reason or reasons to support your answer taking into consideration the possible consequences of the cash being provided by any of the other two activities over the long run. Prepare a complete statement of cash flows for October 2021 using the indirect method based on the information and guidance provided above.
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.
The comparative
The owners have asked each student from your accounting course to assist with the needed clarification and have put forward the following financial information grouped according to your surname initial.
Financial info to be used by surnames with initials (N, B, J, X, H)
|
Sign Language Hearing Co Ltd |
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|
Comparative Balance Sheet |
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|
October 31, 2020, and 2021 |
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|
|
2021 |
2020 |
|
Assets |
|
|
|
Cash and cash equivalent |
350,000 |
450,000 |
|
|
440,850 |
- |
|
Inventory |
225,222 |
315,898 |
|
Prepaid expenses |
185,000 |
185,000 |
|
Equipment, net |
668,500 |
495,880 |
|
Total Assets |
1,869,572 |
1,446,778 |
|
Liabilities |
|
|
|
Accounts payable |
- |
198,500 |
|
Accrued liabilities |
225,550 |
190,545 |
|
Bond payable |
555,840 |
365,520 |
|
|
|
|
|
Common Stock |
245,600 |
145,600 |
|
|
1,037,582 |
711,613 |
|
|
(195,000) |
(165,000) |
|
Total liabilities and stockholders' equity |
1,869,572 |
1,446,778 |
|
Sign Language Hearing Co Ltd |
||
|
Income Statement |
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Year Ended October 31,2021 |
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Revenues and gains: |
|
|
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Sales revenue |
1,500,000 |
|
|
Gain on sale of equipment |
28,000 |
|
|
Interest revenue |
|
|
|
Total revenues and gains |
|
1,528,000 |
|
Expenses |
|
|
|
Cost of goods sold |
704,500 |
|
|
Salary expense |
185,000 |
|
|
|
40,000 |
|
|
Rent expense |
200,000 |
|
|
Total expenses |
|
1,129,500 |
|
Income before income taxes |
|
398,500 |
|
Income tax expense |
|
44,500 |
|
Net Profit |
|
354,000 |
|
Notes |
||
|
Purchase of equipment |
337,620 |
|
|
Cash receipt from sale of equipment |
153,000 |
|
|
Issuance of bonds payable to borrow cash |
190,320 |
|
|
Cash receipt from issuance of common stock |
100,000 |
|
|
Dividend paid |
28,031 |
|
|
Book value of equipment sold |
125,000 |
|
|
Purchase of treasury stock |
30,000 |
Requirements
- In comparison to investing and financing activities, it is often said that cash from operating activities must be the main source of cash to achieve long term success of the company. Do you agree or disagree with this statement? In your own words, give reason or reasons to support your answer taking into consideration the possible consequences of the cash being provided by any of the other two activities over the long run.
- Prepare a complete statement of cash flows for October 2021 using the indirect method based on the information and guidance provided above.
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