Among the transactions of Salem, Inc., were the following. Made payments on accounts payable to merchandise suppliers. Paid the principal amount of a note payable to First State Bank. Paid interest charges relating to a note payable to First State Bank. Issued bonds payable for cash; management plans to use this cash in the near future to expand manufacturing and warehouse capabilities. Paid salaries to employees in the finance department. Collected an account receivable from a customer. Transferred cash from the general bank account into a money market fund. Used the cash received in d, to purchase land and a building suitable for a manufacturing facility. Made a year-end adjusting entry to recognize depreciation expense. At year-end, purchased for cash an insurance policy covering the next 12 months. Paid the quarterly dividend on preferred stock. Paid the semiannual interest on bonds payable. Received a quarterly dividend from an investment in the preferred stock of another corporation. Sold for cash an investment in the preferred stock of another corporation. Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.) Instructions Most of the preceding transactions should be included among the activities summarized in a statement of cash flows. For each transaction that should be included in this statement, indicate whether the transaction is classified as an operating activity, an investing activity, or a financing activity. If the transaction should not be included in the current year’s statement of cash flows, briefly explain why not. (Assume that net cash flows from operating activities are determined by the direct method.)
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.
Among the transactions of Salem, Inc., were the following.
-
Made payments on accounts payable to merchandise suppliers.
-
Paid the principal amount of a note payable to First State Bank.
-
Paid interest charges relating to a note payable to First State Bank.
-
Issued bonds payable for cash; management plans to use this cash in the near future to expand manufacturing and warehouse capabilities.
-
Paid salaries to employees in the finance department.
-
Collected an
account receivable from a customer. -
Transferred cash from the general bank account into a
money market fund. -
Used the cash received in d, to purchase land and a building suitable for a manufacturing facility.
-
Made a year-end
adjusting entry to recognize depreciation expense. -
At year-end, purchased for cash an insurance policy covering the next 12 months.
-
Paid the quarterly dividend on
preferred stock . -
Paid the semiannual interest on bonds payable.
-
Received a quarterly dividend from an investment in the preferred stock of another corporation.
-
Sold for cash an investment in the preferred stock of another corporation.
-
Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.)
Instructions
Most of the preceding transactions should be included among the activities summarized in a statement of
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