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 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
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 |
Statement of Cash Flow:
Statement of cash flow is one of the main financial statement which reports cash flow and cash outflow during the given time period. Money coming into the business is cash inflow and money going out is a cash outflow. It can be prepared for a week, month, quarterly, or yearly. Statement of cash flow is a cash basis statement and balance sheet and income statement are accrual basis statements.
Statement of cash flow categorizes how much cash is used or generated by the main three sections of the business.
- Operating Activities
- Investing Activities
- Financing Activities
Operating Activities:
The first section is the operating section. This is the main activity or operation of a business which is conducted for the sole purpose of earning revenues for the business. It can be calculated using the direct or direct method. In the given problem, we are required to prepare the cash flow statement using the indirect method.
Indirect Method:
Net income is the first line which is taken from the income statement. The logic is we need to follow the process which converts net income into net operating cash income. So, all the non-cash and non-operating adjustments are done at this point. Current assets and liabilities are part of the operating section, so any change in them during the period is also converted into a cash basis from an accrual basis.
Investing Activities:
This section involves cash used for and generated by the purchase or sale of long-term assets respectively. This is the second section of the cash flow statement. This section focuses on cash flows related to the acquisition and disposal of the company's long-term assets investments like plant, property, equipment, investment in subsidiaries, etc.
Cash flows from investing activities are separately reported because it is important for the users of the financial statements to know whether the company is investing in resources or whether it is disposing of the resources already owned. This will affect future period profits based on the company's expansion plans.
Financing Activities:
This section involves cash generated and used for financing or repaying the capital and long term debts. Cash flows from financing activities is the last of the three sections. It shows the cash flows and outflows related to finance, i.e. owners and creditors of the company.
As we have discussed the concepts, let us prepare the statement of cash flow for the year ended December 31, 2014
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