The balance sheets for Sports Unlimited for 2021 and 2020 are provided below.SPORTS UNLIMITED Balance Sheets For the years ended December 31 2021 2020AssetsCurrent assets:Cash $ 103,500 $ 70,400Accounts receivable 46,800 32,000Inventory 44,550 71,200Prepaid rent 7,200 3,600Long-term assets:Investment in bonds 54,900 0Land 117,450 141,600Equipment 106,200 102,000Less: Accumulated depreciation (30,600) (20,800)Total assets $ 450,000 $ 400,000Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable $ 30,150 $ 46,800Interest payable 7,200 3,600Income tax payable 12,150 10,000Long-term liabilities:Notes payable 138,150 127,600Stockholders’ equity:Common stock 144,000 144,000Retained earnings 118,350 68,000Total liabilities and stockholders’ equity $ 450,000 $ 400,000Required:1. Prepare a vertical analysis of Sports Unlimited’s 2021 and 2020 balance sheets. Express each amount as a percentage of total assets for that year.2. Prepare a horizontal analysis of Sports Unlimited’s 2021 balance sheet using 2020 as the base year.
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 balance sheets for Sports Unlimited for 2021 and 2020 are provided below.
SPORTS UNLIMITED Balance Sheets For the years ended December 31
2021 2020
Assets
Current assets:
Cash $ 103,500 $ 70,400
Accounts receivable 46,800 32,000
Inventory 44,550 71,200
Prepaid rent 7,200 3,600
Long-term assets:
Investment in bonds 54,900 0
Land 117,450 141,600
Equipment 106,200 102,000
Less:
Total assets $ 450,000 $ 400,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 30,150 $ 46,800
Interest payable 7,200 3,600
Income tax payable 12,150 10,000
Long-term liabilities:
Notes payable 138,150 127,600
Stockholders’ equity:
Common stock 144,000 144,000
Retained earnings 118,350 68,000
Total liabilities and stockholders’ equity $ 450,000 $ 400,000
Required:
1. Prepare a vertical analysis of Sports Unlimited’s 2021 and 2020 balance sheets. Express each amount as a percentage of total assets for that year.
2. Prepare a horizontal analysis of Sports Unlimited’s 2021 balance sheet using 2020 as the base year.
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