The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2021, appears below: Service revenue Operating expenses Income before income taxes Income tax expense Net income $ 1,200,000 890,000 310,000 77,500 $ 232,500 The following balance sheet information also is available: 12/31/2021 Cash Accounts receivable Accrued liabilities (for operating expenses) Income taxes payable $ 444,500 158,000 108,000 29,000 12/31/2020 $ 89,000 119,000 79,000 53,000 In addition, the following transactions took place during the year: 1. Common stock was issued for $138,000 in cash. 2. Long-term investments were sold for $69,000 in cash. The original cost of the investments also was $69,000. 3. $99,000 in cash dividends was paid to shareholders. 4. The company has no outstanding debt, other than those payables listed above. 5. Operating expenses include $49,000 in depreciation expense. Required: 1. Prepare a statement of cash flows for 2021 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. 2. Prepare the cash flows from operating activities section of Diversified's 2021 statement of cash flows 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.
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