Piura Manufacturing Comparative Balance Sheets For the Years Ended June 30, 20Xland 20X2 20X1 20X2 Assets Cash $ 72,000 $ 146,400 Accounts receivable 44,000 48,000 Inventory Plant and equipment Accumulated depreciation 64,000 44,000 104,000 112,000 (52,000) (48,000) 20,000 $252,000 Land 20,000 $ 322,400 Total assets Liabilities and equity Accounts payable Wages payable Bonds payable Preferred stock (no par) $ 32,000 $ 48,000 4,000 2,400 24,000 16,000 4,000 12,000 Common stock 30,000 36,000 Paid-in capital in excess of par Retained earnings Total liabilities and cquity 50,000 76,000 108,000 132,000 $252,000 $ 322,400 Piura Manufacturing Income Statement For the Year Ended June 30, 20X2 $ 320,000 (200,000) $ 120,000 (88,000) Sales Cost of goods sold Gross margin Operating expenses Net income $ 32,000
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.
The comparative balance sheets and income statement of Piura Manufacturing follow
Additional transactions for 20X2 were as follows:
a. Cash dividends of $8,000 were paid.
b. Equipment was acquired by issuing common stock with a par value of $6,000. The fair
market value of the equipment is $32,000.
c. Equipment with a book value of $12,000 was sold for $6,000. The original cost of the
equipment was $24,000. The loss is included in operating expenses.
d. Two thousand shares of
Required:
1. Prepare a schedule of operating cash flows using (a) the indirect method and (b) the direct
method.
2. Prepare a statement of cash flows using the indirect method.
3. Prepare a statement of cash flows using a worksheet similar to the one shown in
Example 14.8 (p. 804).
4. Form a group with two to four other students, and discuss the merits of the direct and
indirect methods. Which do you think investors might prefer? Should the FASB require
all companies to use the direct method?
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