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. Sign Language Hearing Co Ltd Comparative Balance Sheet October 31, 2020, and 2021 2021 2020 Assets Cash and cash equivalent 450,000 350,000 Accounts Receivable 385,400 440,850 Inventory 185,000 185,000 Prepaid expenses 45,000 - Equipment, net 650,100 410,100 Total Assets 1,715,500 1,385,950 Liabilities Accounts payable 198,500 - Accrued liabilities 145,000 225,550 Bond payable 345,900 222,222 Stockholders' Equity: Common Stock 245,000 193,230 Retained earnings 931,655 844,948 Treasury stock (150,555) (100,000) Total liabilities and stockholders' equity 1,715,500 1,385,950 Sign Language Hearing Co Ltd Income Statement Year Ended October 31,2021 Revenues and gains: Sales revenue 1,045,000 Interest revenue 12,000 Total revenues and gains 1,057,000 Expenses Cost of goods sold 603,500 Salary expense 126,500 Depreciation expense 30,000 Rent expense 125,000 Loss on sale of equipment 15,000 Total expenses 900,000 Income before income taxes 157,000 Income tax expense 42,000 Net Profit 115,000 Notes Purchase of equipment 380,000 Cash receipt from sale of equipment 95,000 Issuance of bonds payable to borrow cash 123,678 Cash receipt from issuance of common stock 51,770 Dividend paid 28,293 Book value of equipment sold 110,000 Purchase of treasury stock 50,555 Requirement: Prepare a complete statement of cash flows for October 2021 using the indirect method.
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
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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 |
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Assets |
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Cash and cash equivalent |
450,000 |
350,000 |
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385,400 |
440,850 |
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Inventory |
185,000 |
185,000 |
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Prepaid expenses |
45,000 |
- |
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Equipment, net |
650,100 |
410,100 |
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Total Assets |
1,715,500 |
1,385,950 |
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Liabilities |
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Accounts payable |
198,500 |
- |
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Accrued liabilities |
145,000 |
225,550 |
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Bond payable |
345,900 |
222,222 |
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Common Stock |
245,000 |
193,230 |
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931,655 |
844,948 |
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(150,555) |
(100,000) |
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Total liabilities and stockholders' equity |
1,715,500 |
1,385,950 |
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Sign Language Hearing Co Ltd |
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Income Statement |
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Year Ended October 31,2021 |
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Revenues and gains: |
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Sales revenue |
1,045,000 |
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Interest revenue |
12,000 |
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Total revenues and gains |
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1,057,000 |
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Expenses |
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Cost of goods sold |
603,500 |
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Salary expense |
126,500 |
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30,000 |
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Rent expense |
125,000 |
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Loss on sale of equipment |
15,000 |
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Total expenses |
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900,000 |
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Income before income taxes |
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157,000 |
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Income tax expense |
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42,000 |
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Net Profit |
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115,000 |
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Notes |
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Purchase of equipment |
380,000 |
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Cash receipt from sale of equipment |
95,000 |
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Issuance of bonds payable to borrow cash |
123,678 |
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Cash receipt from issuance of common stock |
51,770 |
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Dividend paid |
28,293 |
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Book value of equipment sold |
110,000 |
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Purchase of treasury stock |
50,555 |
Requirement:
Prepare a complete statement of cash flows for October 2021 using the indirect method.
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