You are an internal auditor for Shannon Supplies, Inc., and are reviewing the company’s preliminary financial statements. The statements, prepared after making the adjusting entries, but before closing entries for the year ended December 31, 2021, are as follows: SHANNON SUPPLIES, INC. Balance Sheet December 31, 2021 ($ in thousands) Assets Cash $ 2,400 Investment in equity securities 250 Accounts receivable, net 810 Inventory 1,060 Equipment 1,240 Less: Accumulated depreciation (560 ) Total assets $ 5,200 Liabilities and Shareholders’ Equity Accounts payable and accrued expenses $ 3,320 Income tax payable 220 Common stock, $1 par 200 Additional paid-in capital 750 Retained earnings 710 Total liabilities and shareholders’ equity $ 5,200 SHANNON SUPPLIES, INC. Income Statement For the Year Ended December 31, 2021 ($ in thousands) Sales revenue $ 3,400 Operating expenses: Cost of goods sold $ 1,140 Selling and administrative 896 Depreciation 84 2,120 Income before income tax $ 1,280 Income tax expense (320 ) Net income $ 960 Shannon’s income tax rate was 25% in 2021 and previous years. During the course of the audit, the following additional information (not considered when the above statements were prepared) was obtained: Shannon’s investment portfolio consists of blue chip stocks held for long-term appreciation. To raise working capital, some of the shares with an original cost of $180,000 were sold in May 2021. Shannon accountants debited cash and credited investment in equity securities for the $220,000 proceeds of the sale. At December 31, 2021, the fair value of the remaining equity securities in the investment portfolio was $274,000. The state of Alabama filed suit against Shannon in October 2019, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannon’s legal counsel previously believed that an unfavorable outcome of this litigation was not probable, but based on negotiations with state attorneys in 2021, now believes eventual payment to the state of $130,000 is probable, most likely to be paid in 2024. The $1,060,000 inventory total, which was based on a physical count at December 31, 2021, was priced at cost. Based on your conversations with company accountants, you determined that the inventory cost was overstated by $132,000. Electronic counters costing $80,000 were added to the equipment on December 29, 2020. The cost was charged to repairs. Shannon’s equipment, on which the counters were installed, had a remaining useful life of four years on December 29, 2020, and is being depreciated by the straight-line method for both financial and tax reporting. A new tax law was enacted in 2021 which will cause Shannon’s income tax rate to change from 25% to 20% beginning in 2022. Required: Prepare journal entries to record the effects on Shannon’s accounting records at December 31, 2021, for each of the items described above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars not in thousands of dollars.)
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.
You are an internal auditor for Shannon Supplies, Inc., and are reviewing the company’s preliminary financial statements. The statements, prepared after making the
| SHANNON SUPPLIES, INC. Balance Sheet December 31, 2021 ($ in thousands) |
||||
| Assets | ||||
| Cash | $ | 2,400 | ||
| Investment in equity securities | 250 | |||
| Accounts receivable, net | 810 | |||
| Inventory | 1,060 | |||
| Equipment | 1,240 | |||
| Less: |
(560 | ) | ||
| Total assets | $ | 5,200 | ||
| Liabilities and Shareholders’ Equity | ||||
| Accounts payable and accrued expenses | $ | 3,320 | ||
| Income tax payable | 220 | |||
| Common stock, $1 par | 200 | |||
| Additional paid-in capital | 750 | |||
| 710 | ||||
| Total liabilities and shareholders’ equity | $ | 5,200 | ||
| SHANNON SUPPLIES, INC. Income Statement For the Year Ended December 31, 2021 ($ in thousands) |
|||||||
| Sales revenue | $ | 3,400 | |||||
| Operating expenses: | |||||||
| Cost of goods sold | $ | 1,140 | |||||
| Selling and administrative | 896 | ||||||
| Depreciation | 84 | 2,120 | |||||
| Income before income tax | $ | 1,280 | |||||
| Income tax expense | (320 | ) | |||||
| Net income | $ | 960 | |||||
Shannon’s income tax rate was 25% in 2021 and previous years. During the course of the audit, the following additional information (not considered when the above statements were prepared) was obtained:
- Shannon’s investment portfolio consists of blue chip stocks held for long-term appreciation. To raise
working capital , some of the shares with an original cost of $180,000 were sold in May 2021. Shannon accountants debited cash and credited investment in equity securities for the $220,000 proceeds of the sale. - At December 31, 2021, the fair value of the remaining equity securities in the investment portfolio was $274,000.
- The state of Alabama filed suit against Shannon in October 2019, seeking civil penalties and injunctive relief for violations of environmental regulations regulating emissions. Shannon’s legal counsel previously believed that an unfavorable outcome of this litigation was not probable, but based on negotiations with state attorneys in 2021, now believes eventual payment to the state of $130,000 is probable, most likely to be paid in 2024.
- The $1,060,000 inventory total, which was based on a physical count at December 31, 2021, was priced at cost. Based on your conversations with company accountants, you determined that the inventory cost was overstated by $132,000.
- Electronic counters costing $80,000 were added to the equipment on December 29, 2020. The cost was charged to repairs.
- Shannon’s equipment, on which the counters were installed, had a remaining useful life of four years on December 29, 2020, and is being
depreciated by the straight-line method for both financial and tax reporting. - A new tax law was enacted in 2021 which will cause Shannon’s income tax rate to change from 25% to 20% beginning in 2022.
Required:
Prepare journal entries to record the effects on Shannon’s accounting records at December 31, 2021, for each of the items described above. (If no entry is required for a transaction/event, select "No
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