he 2014 comparative balance sheet and 2014 income statement of Simple Things Industries Ltd, have just been distributed at a meeting of the company’s board of directors. The members of the board of directors were desirous of knowing the reason or reasons why the cash balance different from the net income. The company uses the indirect method to prepare the statement of cash flows and it is expected that this should be able to provide the needed clarity required by the directors. Simple Things Industries Ltd. Comparative Balance Sheet December 31, 2014 and 2013 2014 2013 Increase/(Decrease) Assets Cash 190,000 30,000 ? Accounts Receivable 220,000 230,000 ? Supplies 340,000 310,000 ? Prepaid expenses 10,000 30,000 ? Intangible assets 90,000 90,000 ? Equipment, net 900,000 790,000 ? Total Assets 1,750,000 1,480,000 Liabilities Accounts payable 140,000 90,000 ? Accrued liabilities 160,000 190,000 ? Income tax payable 140,000 120,000 ? Long-term notes payable 450,000 500,000 ? Stockholders' Equity Common Stock 310,000 200,000 ? Retained earnings 640,000 400,000 ? Treasury stock (90,000) (20,000) ? Total liabilities and stockholders' equity 1,750,000 1,480,000 Simple Things Industries Ltd Income Statement Year Ended December 31,2014 Revenues and gains: Sales revenue 1,900,000 Gain on sale of Equipment 60,000 Total revenues and gains 1,960,000 Expenses Cost of goods sold 850,000 Depreciation expense 190,000 Other operating expense 360,000 Total expenses 1,400,000 Income before income taxes 560,000 Income tax expense 180,000 Net Income 380,000 Notes Acquisition of Equipment during 2014 450,000 Sale proceed from sale of Equipment 210,000 Receipt for issuance of notes payable 50,000 Payment for note payable 100,000 Dividend paid 140,000 Book value of equipment sold 150,000 Requirements: 1. Reconstruct the company’s comparative balance sheet for 2013/2014 using the information and compute and show the missing figures to include the appropriate sign as a positive or negative figure. 2. Which category of the statement of cash flow is considered as the most important? Why? 3. Prepare a complete statement of cash flows for 2014 using the indirect method using the information.
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.
The 2014 comparative balance sheet and 2014 income statement of Simple Things Industries Ltd, have just been distributed at a meeting of the company’s board of directors. The members of the board of directors were desirous of knowing the reason or reasons why the cash balance different from the net income. The company uses the indirect method to prepare the statement of
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Simple Things Industries Ltd. |
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Comparative Balance Sheet |
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December 31, 2014 and 2013 |
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2014 |
2013 |
Increase/(Decrease) |
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Assets |
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Cash |
190,000 |
30,000 |
? |
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Accounts Receivable |
220,000 |
230,000 |
? |
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Supplies |
340,000 |
310,000 |
? |
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Prepaid expenses |
10,000 |
30,000 |
? |
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Intangible assets |
90,000 |
90,000 |
? |
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Equipment, net |
900,000 |
790,000 |
? |
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Total Assets |
1,750,000 |
1,480,000 |
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Liabilities |
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Accounts payable |
140,000 |
90,000 |
? |
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Accrued liabilities |
160,000 |
190,000 |
? |
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Income tax payable |
140,000 |
120,000 |
? |
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Long-term notes payable |
450,000 |
500,000 |
? |
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Common Stock |
310,000 |
200,000 |
? |
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640,000 |
400,000 |
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(90,000) |
(20,000) |
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Total liabilities and stockholders' equity |
1,750,000 |
1,480,000 |
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Simple Things Industries Ltd |
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Income Statement |
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Year Ended December 31,2014 |
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Revenues and gains: |
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Sales revenue |
1,900,000 |
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Gain on sale of Equipment |
60,000 |
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Total revenues and gains |
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1,960,000 |
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Expenses |
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Cost of goods sold |
850,000 |
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190,000 |
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Other operating expense |
360,000 |
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Total expenses |
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1,400,000 |
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Income before income taxes |
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560,000 |
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Income tax expense |
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180,000 |
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Net Income |
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380,000 |
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Notes |
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Acquisition of Equipment during 2014 |
450,000 |
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Sale proceed from sale of Equipment |
210,000 |
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Receipt for issuance of notes payable |
50,000 |
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Payment for note payable |
100,000 |
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Dividend paid |
140,000 |
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Book value of equipment sold |
150,000 |
Requirements:
1. Reconstruct the company’s comparative balance sheet for 2013/2014 using the information and compute and show the missing figures to include the appropriate sign as a positive or negative figure.
2. Which category of the statement of cash flow is considered as the most important? Why?
3. Prepare a complete statement of cash flows for 2014 using the indirect method using the information.
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