1, at the end of its first year of operations, were: Cash $ 19,500 Accounts Receivable 8,250 Allowance for Doubtful Accounts 885 Inventory 12,060 Prepaid Rent 1,600
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 information applies to the questions displayed below.]
One Product Corporation (OPC) incorporated at the beginning of last year. The balances on its post-closing
| Cash | $ 19,500 |
|---|---|
| 8,250 | |
| Allowance for Doubtful Accounts | 885 |
| Inventory | 12,060 |
| Prepaid Rent | 1,600 |
| Equipment | 25,000 |
| 2,400 | |
| Accounts Payable | 0 |
| Sales Tax Payable | 500 |
| FICA Payable | 600 |
| Withheld Income Taxes Payable | 500 |
| Salaries and Wages Payable | 1,600 |
| 300 | |
| Deferred Revenue | 4,500 |
| Interest Payable | 495 |
| Notes Payable (long-term) | 22,000 |
| Common Stock | 13,300 |
| Additional Paid-In Capital, Common | 19,210 |
| 4,120 | |
| 4,000 |
The following information is relevant to the first month of operations in the following year:
- OPC sells its inventory at $150 per unit, plus sales tax of 6 percent. OPC’s January 1 inventory balance consists of 180 units at a total cost of $12,060. OPC’s policy is to use the FIFO method, recorded using a perpetual inventory system.
- The $1,600 in Prepaid Rent relates to a payment made in December for January rent this year.
- The equipment was purchased on July 1 of last year. It has a residual value of $1,000 and an expected life of five years. It is being
depreciated using the straight-line method. - Employee wages are $4,000 per month. Employees are paid on the 16th for the first half of the month and on the first day of the following month for the second half of each month. Withholdings each pay period include $250 of income taxes and $150 of FICA taxes. These withholdings and the employer’s matching contribution are paid monthly on the second day of the following month. In addition, unemployment taxes of $50 are accrued each pay period, and will be paid on March 31.
- Deferred Revenue is for 30 units ordered and paid for in advance by two customers in late December. One order of 25 units is to be filled in January, and the other will be filled in February.
- Notes Payable arises from a three-year, 9 percent bank loan received on October 1 last year.
- The par value on the common stock is $2 per share.
- Treasury Stock arises from the reacquisition of 500 shares at a cost of $8 per share.
January Transactions
- On 1/01, OPC paid employees’ salaries and wages that were previously accrued on December 31.
- A truck is purchased on 1/02 for $10,000 cash. It is estimated this vehicle will be used for 50,000 miles, after which it will have no residual value.
- Payroll withholdings and employer contributions for December are remitted on 1/03.
- OPC declares a $0.50 cash dividend on each share of common stock on 1/04, to be paid on 1/10.
- A $950 customer account is written off as uncollectible on 1/05.
- On 1/06, recorded sales of 175 units of inventory on account. Sales tax is charged but not yet collected or remitted to the state.
- Sales taxes of $500 that had been collected and recorded in December are paid to the state on 1/07.
- On 1/08, OPC issued 300 shares of treasury stock for $2,400.
- Collections from customers on account, totaling $8,500, are recorded on 1/09.
- On 1/10, OPC distributes the $0.50 cash dividend declared on January 4. The company’s stock price is currently $5 per share.
- OPC purchases on account and receives 70 units of inventory on 1/11 for $4,410.
- The equipment purchased last year for $25,000 is sold on 1/15 for $23,000 cash. Record depreciation for the first half of January prior to recording the equipment disposal.
- Payroll for January 1–15 is recorded and paid on 1/16. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
- Having sold the equipment, OPC pays off the note payable in full on 1/17. The amount paid is $22,585, which includes interest accrued in December and an additional $90 interest through January 17.
- On 1/27, OPC records sales of 30 units of inventory on account. Sales tax is charged but not yet collected or remitted.
- A portion of the advance order from December (25 units) is delivered on 1/29. No sales tax is collected on this transaction because the customer is a U.S. governmental organization that is exempt from sales tax.
- To obtain funds for purchasing new equipment, OPC issued bonds on 1/30 with a total face value of $90,000, stated interest rate of 5 percent, annual compounding, and six-year maturity date. OPC received $81,420 from the bond issuance, which implies a market interest rate of 7 percent.
- On 1/31, OPC records units-of-production depreciation on the vehicle (truck), which was driven 1,900 miles this month.
- OPC estimates that 2% of the ending accounts receivable balance will be uncollectible. Adjust the applicable accounts on 1/31, using the allowance method.
- On 1/31, adjust for January rent expired.
- Accrue January 31 payroll on 1/31, which will be payable on February 1. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
- Accrue OPC’s corporate income taxes on 1/31, estimated to be $3,750.
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