The following data are taken from the December 31 annual report of Bailey Company: PROBLEM 5-3 Analyzing Investment Securities Transactions ($ in thousands) 2004 2005 2006 $70,000 2,500 1,500 Sales.. $50,000 $60,000 2,200 1,200 Net income.... 2,000 Dividends paid..... 1,000 Bailey had 1,000,000 common shares outstanding during this entire period and there is no public market for Bailey Company shares. Also during this period, Simpson Corp. bought Bailey shares for cash, as follows: January 1, 2004 January 1, 2005 290,000 shares at $11 per share, increasing ownership to 300,000 shares January 1, 2006 700,000 shares at $15 per share, resulting in 100% ownership of Bailey Company 10,000 shares at $10 per share Simpson assumed significant influence over Bailey's management in 2005. Ignore income tax effects and the opportunity costs of making investments in Bailey for the requirements listed here. Required: a. Compute the effects of these investments on Simpson's reported sales, net income, and cash flows for each of the years 2004 and 2005. b. Compute the carrying (book) value of Simpson's investment in Bailey as of December 31, 2004, and December 31, 2005. c. Identify the U.S. GAAP-based accounting method Simpson would use to account for its intercorporate invest- ment in Bailey for 2006. Give two reasons this accounting method must/should be used. CHECK (b) Book value, 12/31/2005, $3,600,000
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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