Prepare a statement of cash flows using the indirect method. (
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 comparative balance sheets for Metlock Corporation show the following information.
December 31
2020 2019
Cash $33,500 $12,900
Inventory 12,100 9,000
Available-for-sale debt investments –0– 3,000
Buildings –0– 29,800
Equipment 44,800 19,900
Patents 5,000 6,300
$107,800 $90,900
Allowance for doubtful accounts $3,100 $4,500
Accumulated
Accumulated depreciation—building –0– 6,000
Accounts payable 5,000 3,000
Dividends payable –0– 4,900
Notes payable, short-term (nontrade) 3,000 4,100
Long-term notes payable 31,000 25,000
Common stock 43,000 33,000
Retained earnings 20,700 5,900
$107,800 $90,900
Additional data related to 2020 are as follows.
1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500.
2. $10,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $4,900.
4. On January 1, 2020, the building was completely destroyed by a flood. Insurance proceeds on the building were $29,900 (net of $2,000 taxes).
5. Debt investments (available-for-sale) were sold at $1,800 above their cost. The company has made similar sales and investments in the past.
6. Cash was paid for the acquisition of equipment.
7. A long-term note for $16,000 was issued for the acquisition of equipment.
8. Interest of $2,000 and income taxes of $6,500 were paid in cash.
Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)
METLOCK CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flows from Operating Activities
Net Income
$
14,800
Adjustments to reconcile net income to
Cash Flows from Financing Activities
Depreciation Expense
$
1,900
Patent Amortization
1,300
Loss on Sale of Equipment
4,100
Gain from Flood Damage
(8,100)
Increase in Accounts Receivable (Net)
(3,800)
Increase in Inventory
(3,100)
Increase in Accounts Payable
2,000
-7,500
Net Increase in Cash
$
Supplemental disclosures of cash flow information:
$
$
$
$
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