Using the following data, prepare the operating activities section of a statement of cash flows for Maximum Corporation for the year ended December 31, 20X6, using the indirect method. Increase in salary payable $1,50 Decrease in accounts payable 2,0000 Increase in accounts receivable 3,500 Net income 98,00 Decrease in inventory 5,800 Increase in prepaid expenses 1,200 Depreciation expense – equipment 5,000 Depreciation expense – building 7,500 Gain on sale of equipment 1,300 Loss on sale of patent 2,500 Question 2 A. In the long run it is more
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.
Using the following data, prepare the operating activities section of a statement of
Maximum Corporation for the year ended December 31, 20X6, using the indirect method.
Increase in salary payable $1,50
Decrease in accounts payable 2,0000
Increase in accounts receivable 3,500
Net income 98,00
Decrease in inventory 5,800
Increase in prepaid expenses 1,200
Depreciation expense – building 7,500
Gain on sale of equipment 1,300
Loss on sale of patent 2,500
Question 2
A. In the long run it is more important for a business to have positive cash flows from its
operating activities, investing activities or financing activities? Why?
B. Identify three factors that may cause net income to differ from net cash flows from operating
activities.
C. Describe how the Statement of Cash Flows helps investors and creditors perform each of
the following functions: predict future cash flows; evaluate management decisions; predict
the ability to make debt payments to lenders and pay dividends to stockholders.
D. Name and explain the three (3) categories of cash-flow activities.
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