Required: Prepare a January 1 - December 31 income statement for the business. Prepare a January 1 - December 31 statement of retained earnings. Prepare a December 31 balance sheet. Prepare the closing entries in the order outlined in the book and in class.
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.
Angel Valdez is an owner and manager of Angel V's Inc., which began operations a few years prior. On December 31, AV's shows the following selected accounts and amounts for the fiscal year ended December 31.
| Account | Debit | Credit | Account | Debit | Credit | |
| Cash | $ 25,394 | Common stock | $ 79,500 | |||
| Accounts receivable | 24,010 | Paid-in capital in excess of par-C.S. | 485,475 | |||
| Allowance for doubtful accounts | 807 | 229,941 | ||||
| Interest receivable | 100 | Cash Dividends | 10,004 | |||
| Inventory | 48,004 | Sales | 2,297,999 | |||
| Supplies | 10,410 | Sales discounts | 13,276 | |||
| Prepaid insurance | 3,272 | Sales returns & allowances | 62,900 | |||
| Prepaid rent | 5,398 | Interest revenue | 2,203 | |||
| Notes receivable | 39,004 | Gain on sale of plant asset | 4,226 | |||
| Investment in stock | 25,994 | Cost of goods sold | 1,266,441 | |||
| Land | 144,994 | Depreciation expense | 44,720 | |||
| Buildings | 1,394,986 | Amortization expense | 4,175 | |||
| Equipment | 215,400 | Salaries expense | 569,992 | |||
| 85,443 | Insurance expense | 1,458 | ||||
| Accumulated Depreciation - Equipment | 44,968 | Rent expense | 12,952 | |||
| Patents | 41,990 | Supplies expense | 114,419 | |||
| Accounts payable | 32,270 | Utilities expense | 3,873 | |||
| Salaries payable | 21,293 | Interest expense | 38,473 | |||
| Interest payable | 7,420 | Income tax expense | 22,168 | |||
| Income tax payable | 1,740 | 775 | ||||
| Unearned revenue | 8,471 | Freight-out | 25,214 | |||
| Notes payable | 57,797 | Loss on sale of plant asset | 3,245 | |||
| Mortgage payable | 582,588 | |||||
| Bonds payable | 230,900 | Totals | $ 4,173,041 | $ 4,173,041 |
Additional information:
- The Note receivable is due to the company in 3 months.
- The Notes payable is not due for 2 years.
- The Prepaid insurance is for a policy that expires October 1 (good for 9 more months).
- The Prepaid rent is for the next 6 months.
- Bonds payable mature in 15 years.
- The Mortgage payable is due over a 20-year period and $15,000 of the principal is due next year.
- The company plans to hold the Investments in stock for at least the next 18 months.
Required:
- Prepare a January 1 - December 31 income statement for the business.
- Prepare a January 1 - December 31 statement of retained earnings.
- Prepare a December 31 balance sheet.
- Prepare the closing entries in the order outlined in the book and in class.
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