epare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one
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.
Horizontal Analysis of the Income Statement
Income statement data for Winthrop Company for two recent years ended December 31 are as follows:
| Current Year | Previous Year | ||||
| Sales | $2,240,000 | $2,000,000 | |||
| Cost of goods sold | (1,925,000) | (1,750,000) | |||
| Gross profit | $315,000 | $250,000 | |||
| Selling expenses | $(152,500) | $(125,000) | |||
| Administrative expenses | (118,000) | (100,000) | |||
| Total operating expenses | $(270,500) | $(225,000) | |||
| Income before income tax expense | $44,500 | $25,000 | |||
| Income tax expense | (17,800) | (10,000) | |||
| Net income | $26,700 | $15,000 |
a. Prepare a comparative income statement with horizontal analysis, indicating the increase (decrease) for the current year when compared with the previous year. If required, round to one decimal place.
| Winthrop Company | ||||
| Comparative Income Statement | ||||
| For the Years Ended December 31 | ||||
| Current year Amount |
Previous year Amount |
Increase (Decrease) Amount |
Increase (Decrease) Percent |
|
| Sales | $2,240,000 | $2,000,000 | $fill in the blank 046aeef91077033_1 | fill in the blank 046aeef91077033_2% |
| Cost of goods sold | (1,925,000) | (1,750,000) | fill in the blank 046aeef91077033_3 | fill in the blank 046aeef91077033_4% |
| Gross profit | $315,000 | $250,000 | $fill in the blank 046aeef91077033_5 | fill in the blank 046aeef91077033_6% |
| Selling expenses | $(152,500) | $(125,000) | fill in the blank 046aeef91077033_7 | fill in the blank 046aeef91077033_8% |
| Administrative expenses | (118,000) | (100,000) | fill in the blank 046aeef91077033_9 | fill in the blank 046aeef91077033_10% |
| Total operating expenses | $(270,500) | $(225,000) | $fill in the blank 046aeef91077033_11 | fill in the blank 046aeef91077033_12% |
| Income before income tax expense | $44,500 | $25,000 | $fill in the blank 046aeef91077033_13 | fill in the blank 046aeef91077033_14% |
| Income tax expense | (17,800) | (10,000) | fill in the blank 046aeef91077033_15 | fill in the blank 046aeef91077033_16% |
| Net income | $26,700 | $15,000 | $fill in the blank 046aeef91077033_17 | fill in the blank 046aeef91077033_18% |
b. The net income for Winthrop Company increased between years. This increase was the combined result of an increase in sales and a lower percentage increase in cost of goods sold. The cost of goods sold increased at a slower rate than the increase in sales, thus causing the percentage increase in gross profit to be greater than the percentage increase in sales.
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