The 2014 comparative balance sheet and 2014 income statement of Byfield Co 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 110,000 70,000 Accounts Receivable Supplies Prepaid expenses Intangible assets Equipment, net Total Assets Liabilities Accounts payable Accrued liabilities Income tax payable Long-term notes payable Stockholders' Equity Common Stock Retained earnings 300,000 350.000 325,000 280,000 35,000 215.000 1,200,000 2,210,000 28,000 215,000 980,000 1,898,000 250,000 210,000 78,000 140,000 215,000 98,500 725,000 602,000 410,000 330,000 730,000 450,000 Treasury stock Total liabilities and stockholders' equity (70,000) (60,500) 2,210,000 1,898,000 Income Statement Year Ended December 31,2014 Revenues and gains: Sales revenue Gain on sale of Equipment Total revenues and gains 2,100,000 85,000 2,185,000 Expenses Cost of goods sold Depreciation expense Other operating expense Total expenses Income before income taxes Income tax expense Net Income 900,000 150,000 350,000 1,400,000 785,000 210,000 575,000 Notes Acquisition of Equipment during 2014 Sale proceed from sale of Equipment Receipt for issuance of notes payable Payment for note payable Dividend paid Book value of equipment sold 540,000 255,000 27,000 150,000 295,000 170,000 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.
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