During the course of your examination of the financial statements of the Hales Corporation for the year endedDecember 31, 2016, you discover the following:a. An insurance policy covering three years was purchased on January 1, 2016, for $6,000. The entire amountwas debited to insurance expense and no adjusting entry was recorded for this item.b. During 2016, the company received a $1,000 cash advance from a customer for merchandise to be manufacturedand shipped in 2017. The $1,000 was credited to sales revenue. No entry was recorded for the cost ofmerchandise.c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing$750 were on hand at December 31.d. Hales borrowed $20,000 from a local bank on October 1, 2016. Principal and interest at 12% will be paid onSeptember 30, 2017. No accrual was recorded for interest.e. Net income reported in the 2016 income statement is $30,000 before reflecting any of the above items.Required:Determine the proper amount of net income for 2016.
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.
During the course of your examination of the financial statements of the Hales Corporation for the year ended
December 31, 2016, you discover the following:
a. An insurance policy covering three years was purchased on January 1, 2016, for $6,000. The entire amount
was debited to insurance expense and no
b. During 2016, the company received a $1,000 cash advance from a customer for merchandise to be manufactured
and shipped in 2017. The $1,000 was credited to sales revenue. No entry was recorded for the cost of
merchandise.
c. There were no supplies listed in the balance sheet under assets. However, you discover that supplies costing
$750 were on hand at December 31.
d. Hales borrowed $20,000 from a local bank on October 1, 2016. Principal and interest at 12% will be paid on
September 30, 2017. No accrual was recorded for interest.
e. Net income reported in the 2016 income statement is $30,000 before reflecting any of the above items.
Required:
Determine the proper amount of net income for 2016.
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