orten Company's current year income statement, comparative balance sheets, and additional information follow. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. FORTEN COMPANY Comparative Balance Sheets December 31 Current Year Prior Year Assets Cash $ 58,900 $ 79,500 Accounts receivable 74,830 56,625 Inventory 284,656 257,800 Prepaid expenses 1,270 2,015 Total current assets 419,656 395,940 Equipment 151,500 114,000 Accum. depreciation—Equipment (39,625 ) (49,000 ) Total assets $ 531,531 $ 460,940 Liabilities and Equity Accounts payable $ 59,141 $ 123,675 Short-term notes payable 11,800 7,200 Total current liabilities 70,941 130,875 Long-term notes payable 62,000 54,750 Total liabilities 132,941 185,625 Equity Common stock, $5 par value 171,750 156,250 Paid-in capital in excess of par, common stock 46,500 0 Retained earnings 180,340 119,065 Total liabilities and equity $ 531,531 $ 460,940 FORTEN COMPANY Income Statement For Current Year Ended December 31 Sales $ 612,500 Cost of goods sold 291,000 Gross profit 321,500 Operating expenses Depreciation expense $ 26,750 Other expenses 138,400 165,150 Other gains (losses) Loss on sale of equipment (11,125 ) Income before taxes 145,225 Income taxes expense 32,650 Net income $ 112,575 Additional Information on Current Year Transactions The loss on the cash sale of equipment was $11,125 (details in b). Sold equipment costing $64,875, with accumulated depreciation of $36,125, for $17,625 cash. Purchased equipment costing $102,375 by paying $42,000 cash and signing a long-term note payable for the balance. Borrowed $4,600 cash by signing a short-term note payable. Paid $53,125 cash to reduce the long-term notes payable. Issued 3,100 shares of common stock for $20 cash per share. Declared and paid cash dividends of $51,300
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.
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Forten Company's current year income statement, comparative
| FORTEN COMPANY Comparative Balance Sheets December 31 |
|||||||||||
| Current Year | Prior Year | ||||||||||
| Assets | |||||||||||
| Cash | $ | 58,900 | $ | 79,500 | |||||||
| Accounts receivable | 74,830 | 56,625 | |||||||||
| Inventory | 284,656 | 257,800 | |||||||||
| Prepaid expenses | 1,270 | 2,015 | |||||||||
| Total current assets | 419,656 | 395,940 | |||||||||
| Equipment | 151,500 | 114,000 | |||||||||
| Accum. |
(39,625 | ) | (49,000 | ) | |||||||
| Total assets | $ | 531,531 | $ | 460,940 | |||||||
| Liabilities and Equity | |||||||||||
| Accounts payable | $ | 59,141 | $ | 123,675 | |||||||
| Short-term notes payable | 11,800 | 7,200 | |||||||||
| Total current liabilities | 70,941 | 130,875 | |||||||||
| Long-term notes payable | 62,000 | 54,750 | |||||||||
| Total liabilities | 132,941 | 185,625 | |||||||||
| Equity | |||||||||||
| Common stock, $5 par value | 171,750 | 156,250 | |||||||||
| Paid-in capital in excess of par, common stock | 46,500 | 0 | |||||||||
| 180,340 | 119,065 | ||||||||||
| Total liabilities and equity | $ | 531,531 | $ | 460,940 | |||||||
| FORTEN COMPANY Income Statement For Current Year Ended December 31 |
|||||||
| Sales | $ | 612,500 | |||||
| Cost of goods sold | 291,000 | ||||||
| Gross profit | 321,500 | ||||||
| Operating expenses | |||||||
| Depreciation expense | $ | 26,750 | |||||
| Other expenses | 138,400 | 165,150 | |||||
| Other gains (losses) | |||||||
| Loss on sale of equipment | (11,125 | ) | |||||
| Income before taxes | 145,225 | ||||||
| Income taxes expense | 32,650 | ||||||
| Net income | $ | 112,575 | |||||
Additional Information on Current Year Transactions
- The loss on the cash sale of equipment was $11,125 (details in b).
- Sold equipment costing $64,875, with
accumulated depreciation of $36,125, for $17,625 cash. - Purchased equipment costing $102,375 by paying $42,000 cash and signing a long-term note payable for the balance.
- Borrowed $4,600 cash by signing a short-term note payable.
- Paid $53,125 cash to reduce the long-term notes payable.
- Issued 3,100 shares of common stock for $20 cash per share.
- Declared and paid cash dividends of $51,300.
Problem 16-3A Indirect: Statement of cash flows LO A1, P2, P3
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