Answer the following questions for the directors: True or false, does the statement of cash flows explains the difference between net income and the change in the cash balance? True or false, investors and management use the statement of cash flows to evaluate a firm's profitability? True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans? True or false, the financing activities section of the statement of cash flows reflects the cash flows that affect current assets and liabilities? True or false, buying property, plant and equipment would be considered a cash outflow from financing? True or false, the financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term liability accounts? True or false, suppose Auga Company Ltd just started business and was looking for additional capital in order to purchase a property to build their headquarters. If they found an investor who was willing to sell them land worth $500,000 in exchange for stock in the company, would this transaction be shown in the investing activities section of the statement of cash flows? 2. Reconstruct the company’s comparative balance sheet for 2020/2021 using the information and compute and show the missing figures to include the appropriate sign as a positive or negative figure. 3. Prepare a complete statement of cash flows for 2021 using the indirect method using the information. Auga Company Ltd. Comparative Balance Sheet December 31, 2020 and 2021 2021 2020 Increase/(Decrease) Assets Cash 238,000 215,200 ? Accounts Receivable 303,200 259,300 ? Inventories 358,300 348,200 ? Prepaid expenses 35,350 43,100 ? Intangible assets 205,000 205,000 ? Plant assets, net 1,105,000 910,000 ? Total Assets 2,244,850 1,980,800 Liabilities Accounts payable 254,300 240,000 ? Accrued liabilities 415,300 410,000 ? Income tax payable 115,000 135,400 ? Long-term notes payable 845,400 910,500 ? Stockholders' Equity Common Stock 295,500 275,300 ? Retained earnings 345,600 295,400 ? Treasury stock (26,250) (285,800) ? Total liabilities and stockholders' equity 2,244,850 1,980,800 Auga Company Ltd. Income Statement Year Ended December 31,2021 Revenues and gains: Sales revenue 2,224,000 Gain on sale of plant assets 115,500 Total revenues and gains 2,339,500 Expenses Cost of goods sold 1,305,000 Depreciation expense 165,400 Other operating expense 405,400 Total expenses 1,875,800 Income before income taxes 463,700 Income tax expense 265,000 Net Income 198,700 Notes Acquisition of plant asset during 2021 600,900 Sale proceeds from sale of plant asset 356,000 Receipt for issuance of notes payable 384,900 Payment for note payable 450,000 Dividend paid 148,500 Book value of equipment sold 240,500
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.
- Answer the following questions for the directors:
- True or false, does the statement of cash flows explains the difference between net income and the change in the cash balance?
- True or false, investors and management use the statement of cash flows to evaluate a firm's profitability?
- True or false, the financing activities section of the statement of cash flows includes paying dividends and paying off loans?
- True or false, the financing activities section of the statement of cash flows reflects the cash flows that affect current assets and liabilities?
- True or false, buying property, plant and equipment would be considered a
cash outflow from financing? - True or false, the financing section of the statement of cash flows reflects transactions in the equity accounts and the long-term liability accounts?
- True or false, suppose Auga Company Ltd just started business and was looking for additional capital in order to purchase a property to build their headquarters. If they found an investor who was willing to sell them land worth $500,000 in exchange for stock in the company, would this transaction be shown in the investing activities section of the statement of cash flows?
2. Reconstruct the company’s comparative
3. Prepare a complete statement of cash flows for 2021 using the indirect method using the information.
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Auga Company Ltd. |
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Comparative Balance Sheet |
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December 31, 2020 and 2021 |
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2021 |
2020 |
Increase/(Decrease) |
|
Assets |
|
|
|
|
Cash |
238,000 |
215,200 |
? |
|
Accounts Receivable |
303,200 |
259,300 |
? |
|
Inventories |
358,300 |
348,200 |
? |
|
Prepaid expenses |
35,350 |
43,100 |
? |
|
Intangible assets |
205,000 |
205,000 |
? |
|
Plant assets, net |
1,105,000 |
910,000 |
? |
|
Total Assets |
2,244,850 |
1,980,800 |
|
|
Liabilities |
|
|
|
|
Accounts payable |
254,300 |
240,000 |
? |
|
Accrued liabilities |
415,300 |
410,000 |
? |
|
Income tax payable |
115,000 |
135,400 |
? |
|
Long-term notes payable |
845,400 |
910,500 |
? |
|
|
|
|
|
|
Common Stock |
295,500 |
275,300 |
? |
|
Retained earnings |
345,600 |
295,400 |
? |
|
|
(26,250) |
(285,800) |
? |
|
Total liabilities and stockholders' equity |
2,244,850 |
1,980,800 |
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|
Auga Company Ltd. |
||
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Income Statement |
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Year Ended December 31,2021 |
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Revenues and gains: |
|
|
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Sales revenue |
2,224,000 |
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Gain on sale of plant assets |
115,500 |
|
|
Total revenues and gains |
|
2,339,500 |
|
Expenses |
|
|
|
Cost of goods sold |
1,305,000 |
|
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Depreciation expense |
165,400 |
|
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Other operating expense |
405,400 |
|
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Total expenses |
|
1,875,800 |
|
Income before income taxes |
|
463,700 |
|
Income tax expense |
|
265,000 |
|
Net Income |
|
198,700 |
|
Notes |
||
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Acquisition of plant asset during 2021 |
600,900 |
|
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Sale proceeds from sale of plant asset |
356,000 |
|
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Receipt for issuance of notes payable |
384,900 |
|
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Payment for note payable |
450,000 |
|
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Dividend paid |
148,500 |
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|
Book value of equipment sold |
240,500 |
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