Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2020. (000 omitted) Net sales revenue $640,000 Costs and expenses Cost of goods sold $500,000 Selling, general, and administrative expenses 66,000 Other, net 17,000 583,000 Income before income tax 57,000 Income tax 19,400 Net income 37,600 Retained earnings at beginning of period, as previously reported 141,000 Adjustment required for correction of error (7,000) Retained earnings at beginning of period, as restated 134,000 Dividends on common stock (12,200) Retained earnings at end of period $159,400 Additional facts are as follows. 1. “Selling, general, and administrative expenses” for 2020 included a charge of $8,500,000 that was usual but infrequently occurring. 2. “Other, net” for 2020 included a loss on sale of equipment of $6,000,000. 3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made). 4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements. Instructions Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
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.
Presented below is a combined single-step income and
| (000 omitted) | ||||||
| Net sales revenue | $640,000 | |||||
| Costs and expenses | ||||||
| Cost of goods sold | $500,000 | |||||
| Selling, general, and administrative expenses | 66,000 | |||||
| Other, net | 17,000 | 583,000 | ||||
| Income before income tax | 57,000 | |||||
| Income tax | 19,400 | |||||
| Net income | 37,600 | |||||
| Retained earnings at beginning of period, as previously reported | 141,000 | |||||
| Adjustment required for correction of error | (7,000) | |||||
| Retained earnings at beginning of period, as restated | 134,000 | |||||
| Dividends on common stock | (12,200) | |||||
| Retained earnings at end of period | $159,400 |
Additional facts are as follows.
1. “Selling, general, and administrative expenses” for 2020 included a charge of $8,500,000 that was usual but infrequently occurring.
2. “Other, net” for 2020 included a loss on sale of equipment of $6,000,000.
3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).
4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
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