The Financial Statements Late that afternoon, Dev went into his study and spread the financial statements out on his desk: Neogi Chemicals ’s income statement for the year ended December 31, 2006 (Exhibit 1) and the company’s balance sheet as of December 31, 2006 (Exhibit 2). “Interesting,” said Dev to the empty room. “An income statement and a balance sheet but no statement of cash flow. But Ajay said this was a complete set of financial statements for 2006. I suppose I will have to create a statement of cash flow myself.” Dev recalled that Ajay had talked about having purchased some new equipment during the past year to support the growing business, and he had beamed when he talked about the deal he had struck—$75,000 for some equipment that was only three years old and that had had very little use—a deal too good to pass up. At the same time, Ajay had also mentioned that he had sold some equipment that was no longer used for its book value of $25,000. Finally, he had indicated that the company had paid dividends of $20,000 to the owners in 2006. Keeping those figures in mind, Dev began to create a statement of cash flow for Neogi Chemicals . Questions: 1.Using the financial statements and additional information provided in the case, prepare the 2006 statement of cash flow for Neogi Chemicals , Inc.; 2.Analyze the statement of cash flow that you have prepared? (your answer should be in 3-4 bullet points)
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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