Problem 11-4A Prepare a statement of cash flows—indirect method (LO11-2, 11-3, 11-4, 11-5) The income statement, balance sheets, and additional information for Video Phones, Inc., are provided. VIDEO PHONES, INC. Income Statement For the Year Ended December 31, 2021 Net sales $ 2,636,000 Expenses: Cost of goods sold $ 1,600,000 Operating expenses 788,000 Depreciation expense 20,000 Loss on sale of land 7,300 Interest expense 11,500 Income tax expense 41,000 Total expenses 2,467,800 Net income $ 168,200 VIDEO PHONES, INC. Balance Sheets December 31 2021 2020 Assets Current assets: Cash $ 159,180 $ 85,940 Accounts receivable 73,300 53,000 Inventory 105,000 128,000 Prepaid rent 9,120 4,560 Long-term assets: Investments 98,000 0 Land 203,000 226,000 Equipment 256,000 203,000 Accumulated depreciation (60,600 ) (40,600 ) Total assets $ 843,000 $ 659,900 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 59,700 $ 74,000 Interest payable 5,300 8,600 Income tax payable 14,300 13,300 Long-term liabilities: Notes payable 271,000 218,000 Stockholders' equity: Common stock 230,000 230,000 Retained earnings 262,700 116,000 Total liabilities and stockholders’ equity $ 843,000 $ 659,900 Additional Information for 2021: Purchase investment in bonds for $98,000. Sell land costing $23,000 for only $15,700, resulting in a $7,300 loss on sale of land. Purchase $53,000 in equipment by issuing a $53,000 long-term note payable to the seller. No cash is exchanged in the transaction. Declare and pay a cash dividend of $21,500. Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note. (List cash outflows and any decrease in cash as negative amounts.)
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.
Problem 11-4A Prepare a statement of cash flows—indirect method (LO11-2, 11-3, 11-4, 11-5)
The income statement, balance sheets, and additional information for Video Phones, Inc., are provided.
| VIDEO PHONES, INC. | ||||||
| Income Statement | ||||||
| For the Year Ended December 31, 2021 | ||||||
| Net sales | $ | 2,636,000 | ||||
| Expenses: | ||||||
| Cost of goods sold | $ | 1,600,000 | ||||
| Operating expenses | 788,000 | |||||
| 20,000 | ||||||
| Loss on sale of land | 7,300 | |||||
| Interest expense | 11,500 | |||||
| Income tax expense | 41,000 | |||||
| Total expenses | 2,467,800 | |||||
| Net income | $ | 168,200 | ||||
| VIDEO PHONES, INC. | ||||||||
| Balance Sheets | ||||||||
| December 31 | ||||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 159,180 | $ | 85,940 | ||||
| 73,300 | 53,000 | |||||||
| Inventory | 105,000 | 128,000 | ||||||
| Prepaid rent | 9,120 | 4,560 | ||||||
| Long-term assets: | ||||||||
| Investments | 98,000 | 0 | ||||||
| Land | 203,000 | 226,000 | ||||||
| Equipment | 256,000 | 203,000 | ||||||
| Accumulated depreciation | (60,600 | ) | (40,600 | ) | ||||
| Total assets | $ | 843,000 | $ | 659,900 | ||||
| Liabilities and |
||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 59,700 | $ | 74,000 | ||||
| Interest payable | 5,300 | 8,600 | ||||||
| Income tax payable | 14,300 | 13,300 | ||||||
| Long-term liabilities: | ||||||||
| Notes payable | 271,000 | 218,000 | ||||||
| Stockholders' equity: | ||||||||
| Common stock | 230,000 | 230,000 | ||||||
| 262,700 | 116,000 | |||||||
| Total liabilities and stockholders’ equity | $ | 843,000 | $ | 659,900 | ||||
Additional Information for 2021:
- Purchase investment in bonds for $98,000.
- Sell land costing $23,000 for only $15,700, resulting in a $7,300 loss on sale of land.
- Purchase $53,000 in equipment by issuing a $53,000 long-term note payable to the seller. No cash is exchanged in the transaction.
- Declare and pay a cash dividend of $21,500.
Required:
Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note. (List
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