You are engaged to audit the financial statements of Sailor Co. The balance sheet below is provided to you: Sailor Co. Balance Sheet December 31, 2021 ASSETS LIABILITIES AND CAPITAL Cash 290,000.00 Accounts payable 190,000.00 Accounts receivable 139,000.00 Notes payable 83,500.00 Notes receivable 200,000.00 Ordinary share capital 300,000.00 Inventory 357,000.00 Retained earnings 412,500.00 Total 986,000.00 Total 986,000.00 The records of Sailor Co. were reviewed. The following errors were discovered. These errors were not corrected until the current year under audit. a. On July 1, 2019, Sailor paid P150,000 for a 5-year insurance policy. The amount was debited to Insurance Expense when paid. b. Sailor Co. failed to record unearned rent revenue of P16,000 and P9,000 in 2018 and 2020, respectively. c. Sailor Co. also failed to recognize accrued expenses of P23,000, P18,000 and P7,000 for 2018, 2019 and 2020, respectively. d. On December 31, 2019, Sailor Co. bought equipment worth P150,000 and furniture worth P85,000. The accountant thought that to make things simple in record keeping these should be expensed outright as it would be all expensed after 5 years anyway. The amount was debited to Miscellaneous Expense. e. Supplies on hand at the end of 2019, 2020 and 2021 of P5,000, P6,500 and P4,000, respectively, was not recorded. Additional information: a. Inquiry with the client reveals that the policy of the company is to depreciate fixed assets using straight line method. b. There are no dividends declared since the beginning of operations on January 1, 2018. c. The company’s accountant doesn’t know accrual basis of accounting so they have been using cash basis of accounting. d. Notes payable is due on December 31, 2023. e. Notes receivable is due on June 30, 2022. f. The net income reported for the years 2018-2021 were: 2018 87,500.00 2019 12,500.00 2020 137,000.00 2021 175,500.00 TRUE OR FALSE Statement 1: The proposed adjusting journal entries to correct the balance sheet includes a credit to Office Supplies Expense of P4,000. Statement 2: The adjusted total current assets for the year ended December 31, 2021 is P1,065,000. Statement 3: The adjusted retained earnings beginning for 2021 is P520,500.
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.
You are engaged to audit the financial statements of Sailor Co. The
Sailor Co.
Balance Sheet
December 31, 2021
ASSETS LIABILITIES AND CAPITAL
Cash 290,000.00 Accounts payable 190,000.00
Notes receivable 200,000.00 Ordinary share capital 300,000.00
Inventory 357,000.00
Total 986,000.00 Total 986,000.00
The records of Sailor Co. were reviewed. The following errors were discovered. These errors were not
corrected until the current year under audit.
a. On July 1, 2019, Sailor paid P150,000 for a 5-year insurance policy. The amount was debited to
Insurance Expense when paid.
b. Sailor Co. failed to record unearned rent revenue of P16,000 and P9,000 in 2018 and 2020,
respectively.
c. Sailor Co. also failed to recognize accrued expenses of P23,000, P18,000 and P7,000 for 2018, 2019
and 2020, respectively.
d. On December 31, 2019, Sailor Co. bought equipment worth P150,000 and furniture worth P85,000. The
accountant thought that to make things simple in record keeping these should be expensed outright as
it would be all expensed after 5 years anyway. The amount was debited to Miscellaneous Expense.
e. Supplies on hand at the end of 2019, 2020 and 2021 of P5,000, P6,500 and P4,000, respectively, was
not recorded.
Additional information:
a. Inquiry with the client reveals that the policy of the company is to
line method
b. There are no dividends declared since the beginning of operations on January 1, 2018.
c. The company’s accountant doesn’t know accrual basis of accounting so they have been using cash
basis of accounting.
d. Notes payable is due on December 31, 2023.
e. Notes receivable is due on June 30, 2022.
f. The net income reported for the years 2018-2021 were:
2018 87,500.00
2019 12,500.00
2020 137,000.00
2021 175,500.00
TRUE OR FALSE
Statement 1: The proposed
Statement 2: The adjusted total current assets for the year ended December 31, 2021 is P1,065,000.
Statement 3: The adjusted retained earnings beginning for 2021 is P520,500.
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