The following is the operating section of the statement of cash flows (direct method) of Battery Builders, Inc.: Collections from customers $ 28,000 Payments to suppliers for inventory purchases (13,000 ) Payments for operating expenses (9,000 ) Payments for income taxes (2,260 ) Cash provided by operating activities 3,740 The following information is obtained from the income statement of Battery Builders: Net income $ 6,740 Depreciation expense 4,000 In addition, the following information is obtained from the comparative balance sheets of Battery Builders (decreases in parentheses): Change in accounts receivable $ 3,000 Change in inventory 3,000 Change in accounts payable 2,000 Change in accrued payables (related to operating expense) (2,000 ) Change in income taxes payable (1,000 ) Required: Prepare a complete accrual-basis income statement for the current year. Compute the cash flows from operations using the indirect approach (that is, start with accrual-basis net income and adjust for various items to obtain cash flows from operations).
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 following is the operating section of the statement of cash flows (direct method) of Battery Builders, Inc.:
Collections from customers $ 28,000
Payments to suppliers for inventory purchases (13,000 )
Payments for operating expenses (9,000 )
Payments for income taxes (2,260 )
Cash provided by operating activities 3,740
The following information is obtained from the income statement of Battery Builders:
Net income $ 6,740
In addition, the following information is obtained from the comparative balance sheets of Battery Builders (decreases in parentheses):
Change in
Change in inventory 3,000
Change in accounts payable 2,000
Change in accrued payables (related to operating expense) (2,000 )
Change in income taxes payable (1,000 )
Required:
Prepare a complete accrual-basis income statement for the current year.
Compute the cash flows from operations using the indirect approach (that is, start with accrual-basis net income and adjust for various items to obtain cash flows from operations).
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