The condensed financial statements of Evoc Company for the years 2019 and 2020 are presented as follows. Evoc Company Statements of Financial Position December 31 2020 2019 Intangibles and other assets € 530 € 510 Property, plant, and equipment 420 380 Investments 10 10 Current assets Prepaid expenses €120 €160 Inventory 430 390 Accounts receivable (net) 470 433 Cash and cash equivalents 330 1,350 360 1,343 Total assets €2,310 €2,243 Equity €1,020 €1,040 Non‐current liabilities 390 393 Current liabilities 900 810 Total equity and liabilities €2,310 €2,243 Evoc Company Income Statements For the Years Ended December 31 2020 2019 Sales revenue €4,000 €3,600 Costs and expenses Cost of goods sold 984 895 Selling and administrative expenses 2,400 2,330 Interest expense 10 20 Total costs and expenses 3,394 3,245 Income before income taxes 606 355 Income tax expense 242 142 Net income € 364 € 213 Compute the following ratios for 2020 and 2019: a. Debt to assets ratio. b. Times interest earned
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 condensed financial statements of Evoc Company for the years 2019 and 2020 are presented as follows.
| Evoc Company Statements of Financial Position December 31 |
||||
| 2020 |
2019 | |||
| Intangibles and other assets | € 530 | € 510 | ||
| Property, plant, and equipment | 420 | 380 | ||
| Investments | 10 | 10 | ||
| Current assets | ||||
| Prepaid expenses | €120 | €160 | ||
| Inventory | 430 | 390 | ||
| Accounts receivable (net) | 470 | 433 | ||
| Cash and cash equivalents | 330 | 1,350 | 360 | 1,343 |
| Total assets | €2,310 | €2,243 | ||
| Equity | €1,020 | €1,040 | ||
| Non‐current liabilities | 390 | 393 | ||
| Current liabilities | 900 | 810 | ||
| Total equity and liabilities | €2,310 | €2,243 |
| Evoc Company Income Statements For the Years Ended December 31 |
||
| 2020 | 2019 | |
| Sales revenue | €4,000 | €3,600 |
| Costs and expenses | ||
| Cost of goods sold | 984 | 895 |
| Selling and administrative expenses | 2,400 | 2,330 |
| Interest expense | 10 | 20 |
| Total costs and expenses | 3,394 | 3,245 |
| Income before income taxes | 606 | 355 |
| Income tax expense | 242 | 142 |
| Net income | € 364 | € 213 |
Compute the following ratios for 2020 and 2019:
a. Debt to assets ratio.
b. Times interest earned
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