Starz Inc. uses the direct method to prepare its statement of cash flows. The following comparative statement of financial position for 2021 and 2022 were presented: At December 31 2022 2021 Property, Plant and Equipment (PPE) $1 260 000 $1 050 000 Accumulated depreciation (450 000) (375 000) Patent 153 000 174 000 Prepaid expenses 18 000 27 000 Inventory 150 000 180 000 Accounts receivable 159 000 117 000 Cash 297 000 153 000 $1 587 000 $1 326 000 Accounts payable $ 153 000 $ 168 000 Accrued liabilities 60 000 42 000 Mortgage payable ---- 450 000 Share capital-Preference 645 000 ----- Share capital-Ordinary 600 000 600 000 Retained earnings 129 000 66 000 $1 587 000 $1 326 000 Additional Information: 1. The Accumulated Depreciation account has been credited only for the depreciation expense for the period. 2. The Retained Earnings account has been charged for dividends of $138 000 and credited for the net income for the year. The statement of profit or loss for 2022 was as follows: Sales $1 980 000 Cost of sales 1 089 000 Gross profit 891 000 Operating expenses 690 000 Net income $ 201 000 Required: a) Complete the ‘Necessary Workings’ schedule below. b) Prepare a statement of cash flows (direct method) for Starz Inc. for the year ended December 31, 2022.
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.
Starz Inc. uses the direct method to prepare its statement of
|
|
At December 31 |
|
|
|
2022 |
2021 |
|
Property, Plant and Equipment (PPE) |
$1 260 000 |
$1 050 000 |
|
|
(450 000) |
(375 000) |
|
Patent |
153 000 |
174 000 |
|
Prepaid expenses |
18 000 |
27 000 |
|
Inventory |
150 000 |
180 000 |
|
Accounts receivable |
159 000 |
117 000 |
|
Cash |
297 000 |
153 000 |
|
|
$1 587 000 |
$1 326 000 |
|
|
|
|
|
Accounts payable |
$ 153 000 |
$ 168 000 |
|
Accrued liabilities |
60 000 |
42 000 |
|
Mortgage payable |
---- |
450 000 |
|
Share capital-Preference |
645 000 |
----- |
|
Share capital-Ordinary |
600 000 |
600 000 |
|
|
129 000 |
66 000 |
|
|
$1 587 000 |
$1 326 000 |
|
|
|
|
Additional Information:
1. The Accumulated Depreciation account has been credited only for the depreciation expense for the period.
2. The Retained Earnings account has been charged for dividends of $138 000 and credited for the net income for the year.
The statement of profit or loss for 2022 was as follows:
|
Sales |
$1 980 000 |
|
Cost of sales |
1 089 000 |
|
Gross profit |
891 000 |
|
Operating expenses |
690 000 |
|
Net income |
$ 201 000 |
Required:
a) Complete the ‘Necessary Workings’ schedule below.
b) Prepare a statement of cash flows (direct method) for Starz Inc. for the year ended December 31, 2022.
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